Spain Bonds Drop With Italy’s on Bets Banks are Cutting Holdings

Spanish bonds fell, with 10-year yields rising the most in seven weeks, amid speculation domestic banks are reducing holdings of the securities before the European Central Bank reviews their balance sheets in 2014.

Italian bonds also dropped, while benchmark German bund yields approached the highest level in two months. France’s 10-year rate rose as the nation sold 4.64 billion euros ($6.4 billion) of bills maturing between 90 and 349 days. Spanish government bonds returned 11 percent this year, according to the Bloomberg World Bond Indexes. European markets close tomorrow for Christmas and re-open on Dec. 27.

“We’ve seen some weakness in Spain and Italy which may be due to domestic banks reducing their holdings,” said Riccardo Barbieri Hermitte, the managing director of fixed-income research at Mizuho International Plc in London. “Banks want to come to the end of the year with lower holdings of government bonds ahead of the ECB assessment.”

Spanish 10-year yields climbed seven basis points, or 0.07 percentage point, to 4.22 percent at 4:17 p.m. London time. That’s the biggest jump since Nov. 5. The yield rose to 4.24 percent earlier, the highest since Dec. 6. The 4.4 percent bond due in October 2023 fell 0.585, or 5.85 euros per 1,000-euro face amount, to 101.445. The rate on similar-maturity Italian bonds increased six basis points to 4.18 percent.

Stress Tests

The ECB will review banks’ balance sheets in early 2014 and conduct stress tests before officially taking over as banking regulator in a year’s time, it said on Oct. 23.

Europe’s so-called peripheral debt has climbed this year as the euro region exited its longest recession on record, and central banks around the world pursued easy monetary policies, prompting investors to seek higher-yielding assets.

Spanish 10-year yields have fallen from this year’s high of 5.59 percent reached in February, while the rate on similar-maturity Italian bonds has slipped from a high of 4.96 percent, also set in February.

German bonds extended declines from last week, when the U.S. Federal Reserve said it would reduce the pace of its asset purchases, damping demand for government debt. The Fed said after a two-day policy meeting ended Dec. 18 it would cut its monthly purchases of Treasuries and mortgage-backed securities to $75 billion from $85 billion starting in January.

German 10-year yields rose one basis point to 1.88 percent after climbing to 1.91 percent on Dec. 20, the highest since Oct. 17. The rate on similar-maturity French bonds increased two basis points to 2.49 percent.

Volatility on Italian bonds was the highest in euro-area markets today, followed by those of Spain and Germany, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.

German bonds lost 1.9 percent this year through Dec. 20, the worst performer of 15 euro-area debt markets tracked by Bloomberg World Bond Indexes. Greece’s returned 46 percent and Italy’s earned 7.4 percent, while France’s were little changed.

To contact the reporters 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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