Italy, Spain Spreads Widen on Concern Crisis ‘Self-Fulfilling’

Italian and Spanish 10-year bonds dropped, pushing yields up to euro-era records versus benchmark German bunds, on concern that slowing growth will hamper efforts to tame the nations’ debt loads.

German 10-year yields touched an eight-month low amid speculation spending cuts included in a U.S. debt-limit compromise agreement will harm the global economy. Investors pared bets on higher euro-region borrowing costs as European producer-price inflation slowed for a second month.

“This has all the features of a self-fulfilling crisis,” said Harvinder Sian, a senior bond strategist at Royal Bank of Scotland Plc in London. “The rise in yields looks pretty relentless, and it doesn’t look as if the politicians are anywhere near to getting ahead of the curve.”

The yield on 10-year Italian bonds rose 13 basis points to 6.14 percent at 4:31 p.m. in London. It earlier surged to 6.25 percent, the most since November 1997. The 4.75 percent security maturity in September 2021 fell 0.895, or 8.95 euros per 1,000-euro ($1,422) face amount, to 90.34. That pushed the difference in yield, or spread, over bunds, to as much as 384 basis points, the most since before the euro was introduced in 1999.

Italian bond futures fell, sending the price difference over bund futures to a record. The September Italian futures contract fell 1 percent to 98.21 after reaching a record 96.75, making the difference over its German equivalent 33.52.

Italian Meeting

“Suddenly, Italy joined the other peripherals,” said Justin Knight, a European rate strategist at UBS AG in London. “Investors are, in general, overweight Italy versus other peripheral markets, and it’s going to be a difficult position to unwind.”

Italy’s Financial Stability Committee is scheduled to meet later today to discuss the increase in bond yields, Ansa reported, without saying where it got the information. Finance Minister Giulio Tremonti will meet officials from the Bank of Italy and market regulators, the news agency said.

Spanish 10-year yields rose eight basis points to 6.28 percent and reached 6.46 percent, the most since 1997. That pushed the spread over similar-maturity German debt as high as 404 basis points.

The crisis risks worsening should the Spanish yield touch 6.5 percent, RBS’s Sian said.

“Anything materially above that risks an acceleration like we saw for Greece, Ireland and Portugal,” he said. “The political willingness to backstop the European Union is now what the market needs.”

Euribor Futures

Euro-region producer prices rose 5.9 percent in June from 6.2 percent in May, as predicted by the median of 20 estimates in a Bloomberg News survey before the data.

Euribor futures rose, signaling investors are reducing bets on higher borrowing costs before European Central Bank policymakers meet to decide policy on Thursday. The implied yield on the futures contract expiring in June 2012 fell six basis points to 1.62 percent, the lowest since October.

The Swiss franc, a traditional haven from financial turmoil, strengthened against all 16 major peers tracked by Bloomberg. European stocks fell to a 10-month low.

German bonds outperformed all their euro-area peers, including France and the Netherlands, with the exception of Irish securities. The French-German spread widened for a fourth straight day to 76 basis points.

Bunds Gain

Bunds advanced for an eighth day. The U.S. House of Representatives yesterday voted to approve measures that will raise the debt limit enough to fund the government until 2013. The deal threatens automatic spending reductions to enforce a goal of cutting $2.4 trillion over the next decade. U.S. Treasuries advanced for a fourth day.

Ten-year bund yields slid four basis points to 2.42 percent, after falling as low as 2.39 percent.

The 10-year euro swap spread, which shows the difference between the swap rate and the yield on benchmark German bunds and is used as a measure of perceived risk, rose for a seventh day, climbing as high as 73 basis points, the most since January 2009.

Widening swap spreads show that “the market is seeing Germany as a flight-to-quality asset more and more given the lack of confidence in the peripheral and U.S. debt markets,” Cagdas Aksu, a fixed-income analyst at Barclays Capital in London, wrote in an e-mailed note today. “The market continues to remain heavily in risk-off mode.”

Belgian Auction

The yield premium investors demand to hold Belgian 10-year bonds instead of benchmark bunds widened to a euro-era record of 207 basis points, even as demand improved at a debt sale.

The nation sold 2.75 billion euros of treasury bills, slightly less than the maximum of 2.8 billion euros sought. Investors sought 2.03 times the amount of three-month bills sold, up from 1.2 times in the previous auction on July 12. Demand for the six-month notes was 2.09 times the amount sold, down from 2.59 times on July 5.

German government bonds handed investors 3.4 percent this year, compared with 4.6 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek bonds have lost 11 percent, while Portugal’s have declined 22 percent, the indexes show.

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