Spanish Bonds Fall After Economy Shrinks as Greek Debt Tumbles

Spain’s government bonds fell for a third day after the central bank said gross domestic product shrank for a fifth quarter, harming the nation’s ability to repay its debt.

Spain’s 10-year yields climbed the most in a week after the budget ministry said the deficit would reach 7.3 percent of GDP this year due to cost of bank bailouts, which aren’t counted by the European Union when assessing targets. German bunds rose after European Central Bank Governing Council member Yves Mersch said bond purchases of bailed-out countries would be limited in time, spurring demand for the region’s safest assets. Spain sold bills and Finland auctioned bonds.

“The deficit miss will be another in a succession of budget targets which the Spanish government have failed to achieve,” said Brian Barry, a fixed-income analyst at Investec Bank Plc in London. “Any figures which suggest a worsening of debt dynamics beyond previously forecast levels could impact Spanish bonds.”

Spain’s 10-year yield rose 13 basis points, or 0.13 percentage point, to 5.62 percent at 5 p.m. in London after gaining as much as 15 basis points, the most since Oct. 15. The 5.85 percent bond due in January 2022 fell 0.93, or 9.30 euros per 1,000-euro ($1,297) face amount, to 101.565.

Spanish GDP shrank 0.4 percent from the previous three months, matching the second-quarter contraction, the Bank of Spain said in its monthly bulletin. The budget ministry said without the bank bailout costs, the deficit would meet the target of 6.3 percent, according to an e-mailed statement.

Losing Streak

Spain’s bonds have fallen each day since Prime Minister Mariano Rajoy said on Oct. 19 he’s not facing pressure to seek a sovereign bailout, a condition of ECB debt purchases.

“The market is realizing that a Spanish bailout request will happen later rather than sooner,” and that is pushing up Spanish yields, said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “The market would like to have clarity on the matter.”

Mersch, who heads Luxembourg’s central bank, said there’s no “quantitative determination of volume” of bond purchases, and the ECB “has not lost sight of risk management.” ECB governing council member Klaas Knot told the Dutch Parliament today that the central bank’s previous debt-purchase program had a “limited and temporary effect.”

Greek Opposition

Bonds of so-called peripheral nations declined as Greek Prime Minister Antonis Samaras’s race to secure 31 billion euros of international aid ran into renewed opposition from his coalition partners.

Evangelos Venizelos of Pasok and the Democratic Left’s Fotis Kouvelis, whose parliamentary seats give Samaras the majority he needs to govern, both said further rollback of labor rules would be unacceptable after a meeting with the prime minister in Athens.

The yield on 10-year Italian bonds rose 10 basis points to 4.87 percent, while Greek 10-year yields jumped 47 basis points to 17.05 percent.

Spain sold three-month bills at an average yield of 1.415 percent, up from 1.203 percent at a previous auction on Sept. 25. Investors bid for 4.32 times the amount allocated, up from 3.29 times last month. The government sold six-month securities at 2.023 percent, versus 2.213 percent in September.

The additional yield investors demand to hold Spanish 10- year securities over their German counterparts widened 18 basis points to 405 basis points.

‘Big Divergence’

“We repeatedly see a big divergence between the short-term relief of debt sales being well attended, and the longer-term reality,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “With such disparate yields between core and periphery, the doubts about ultimate sustainability and the ability to continue financing debt in the weaker countries intensify.”

Germany’s 10-year yield fell five basis points to 1.57 percent after climbing to 1.66 percent on Oct. 18, the highest since Sept. 19.

Volatility on German bonds was the highest in euro-area markets today after Greece and Spain, according to measures of 10-year or equivalent-maturity debt, the spread between two- and 10-year securities, and credit-default swaps.

Finland auctioned 1.5 billion euros of 10- and 30-year bonds, with the September 2022 securities drawing an average yield of 1.806 percent. The sale attracted bids for 1.8 times the amount allotted. Investors bought July 2042 debt at a yield of 2.588 percent.

Finland’s 10-year bond yield declined five basis points to 1.81 percent.

The European Union sold 3 billion euros of securities due in 2027 at a sale via banks. The bonds were priced at 36 basis points above the mid-swap rate.

German bonds returned 2.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spain’s securities rose 3.2 percent and Finland’s gained 4.7 percent.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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