Spanish Bonds Gain Third Day on Bank Outlook; German Bunds Fall
Spanish government bonds rose for a third day after stress tests of the country’s banking system showed a smaller deficit than earlier estimated, spurring optimism the region’s debt crisis is being contained.
Spain’s securities pared last week’s declines after Moody’s Investors Service said the recapitalization of the nation’s banks was positive for its credit rating. Italy’s 10-year yields dropped to the lowest in a week after an industry report showed manufacturing output shrank at a slower pace in September. German bonds declined as demand for safer assets waned. The European Central Bank meets to review monetary policy this week.
“There is a sense of relief after developments last week brought some clarity about Spain,” said Marchel Alexandrovich, a senior European economist at Jefferies International Ltd. in London. “That may reduce demand for safe assets in the run-up to the ECB meeting later this week during which the central bank is likely to reiterate the message that they are ready to do all they can to support the market.”
Spain’s 10-year yield dropped seven basis points, or 0.07 percentage point, to 5.87 percent at 4:07 p.m. London time after climbing 18 basis points last week. The 5.85 percent bond due in January 2022 rose 0.51, or 5.10 euros per 1,000-euro ($1,291) face amount, to 99.855.
The stress tests commissioned by the Spanish government and released Sept. 28 showed the nation’s banks have a capital deficit of 59.3 billion euros, less than the 62 billion euros estimated in June. The tests of 14 lenders revealed seven, including Banco Santander SA (SAN), Banco Bilbao Vizcaya Argentaria SA (BBVA) and CaixaBank (CABK) SA, had no capital shortfall.
The bank “recapitalization will materially enhance the solvency of affected institutions and help restore market confidence in Spain’s banking system,” Moody’s analysts Maria Jose Mori and Alberto Postigo wrote in the company’s Credit Outlook. The “recapitalization is credit positive, but may be insufficient,” they said. Moody’s ranks Spanish debt at Baa3, one step above junk, or non-investment grade.
Spanish bonds stayed higher even after a report showed the jobless rate in the euro area reached the highest on record in August. Unemployment in the region was 11.4 percent, the same as in June and July after those months’ figures were revised higher, the European Union statistics office said.
Spain’s Budget Ministry announced on Sept. 29 plans to borrow 207.2 billion euros next year, increasing the country’s debt to 90.5 percent of gross domestic product.
“Sentiment about Spain has been mixed after some developments last week,” said Soeren Moerch, head of government bond trading at Danske Bank S/A in Copenhagen. “Some in the market are willing to give the country the benefit of the doubt. We’ve seen some good demand for Spanish bonds recently.”
Spain’s 10-year yield will drop to 5.50 percent by year- end, Moerch predicted. The yield fell 39 basis points in the third quarter, the most since the period ended September 2010.
Italian bonds rose after an index based on a survey of purchasing managers by Markit was 45.7 last month, up from 43.6 in August. A reading below 50 indicates contraction.
Italy’s 10-year yield fell as much as four basis points to 5.05 percent, the lowest since Sept. 24. The extra yield investors demand to hold the Italian securities instead of similar-maturity German bunds dropped to 361 basis points today from 365 basis points at the end of last week.
Volatility on Belgian bonds was the highest in euro-region markets today, followed by Portugal, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit default swaps.
Belgian 10-year yields rose one basis point to 2.54 percent, while the rate on Portuguese bonds maturing in October 2023 fell eight basis points to 8.92 percent.
The German 10-year bund futures contract expiring in December declined 0.3 percent to 141.38 after dropping as low as 141.12.
Bund futures have “encountered fresh selling pressure,” after falling below their Sept. 27 low of 141.29, Richard Adcock, head of fixed-income technical strategy in London, wrote today in an e-mailed note. “It is further evidence of the failure of the recent upside.”
The 10-year contract may drop to its Sept. 17 low of 138.41 over the coming weeks, Adcock wrote. Investors should sell at 141.80, targeting a drop to 138.50, he recommended. They should exit the trade should the contract rise to 142.20.
The ECB will meet in Ljubljana, Slovenia, on Oct. 4. Spain is scheduled to sell two-, three- and five-year notes the same day. France will auction bonds due between 2018 and 2041, also on Oct. 4.
German bunds have returned 3.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities rose 0.5 percent and Italy’s gained 15 percent.
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