Italian bonds led a decline in debt from Europe’s most-indebted nations on concern a crisis-fighting strategy agreed on by euro-area leaders at a summit last week won’t halt the spread of the region’s debt crisis.
The five-year Italian yield rose to the highest since the euro was introduced in 1999 as traders speculated Prime Minister Silvio Berlusconi will struggle to deliver pledged deficit cuts. Spain’s 10-year rates rose to a 12-week high as China’s Xinhua News Agency said the Asian nation can’t play the role of “savior” to Europe. Belgian bonds fell after the nation sold debt. German bunds rose as New York-based broker-dealer MF Global Holdings Ltd. filed for bankruptcy.
“The latest deal to resolve the euro-debt crisis is grandiose in its scope but limited in its details,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “Italian bond yields are telling us that the market is not confident that the summit will draw a line under the crisis. They are saying the market still sees scope for bailout contagion and Italy is the next” in line.
The five-year Italian yield rose 16 basis points, or 0.16 percentage point, to 5.91 percent at 4:04 p.m. London time after climbing to 5.99 percent, the highest since September 1997. The 4.75 percent note due in September 2016 fell 0.635, or 6.35 euros per 1,000-euro ($1,396) face amount, to 95.490. Two-year yields increased as much as 33 basis points to 5.08 percent, the most since 2000.
After two crisis summits in four days, European Union leaders agreed on Oct. 27 to increase the bailout fund to 1 trillion euros, recapitalize banks and convince lenders to write down their holdings of Greek debt by 50 percent.
That didn’t halt a slide in Italian debt, with 10-year yields rising 15 basis points on Oct. 28 and another eight basis points today, to 6.10 percent. Spain’s 10-year rate increased three basis points to 5.54 percent, and similar-maturity Belgian yields jumped eight points to 4.38 percent.
The December Italian bond futures contract fell 0.6 percent to 97.04, widening the difference over its German equivalent to 38.22, the most in a month.
MF Global, which said on Oct. 25 it owned $6.3 billion of Italian, Spanish, Belgian, Portuguese and Irish bonds, listed total debt of $39.7 billion and assets of $41 billion in Chapter 11 papers filed today in U.S. Bankruptcy Court in Manhattan. MF Global declined 67 percent last week and its bonds started trading at distressed levels amid its disclosures of bets on European sovereign-debt.
“It’s an example of the market trauma,” said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. “It’s broadly speaking bullish” for bunds, he said.
The yield on 10-year German debt dropped 14 basis points to 2.03 percent, and the rate on similar-maturity Treasuries fell 12 basis points to 2.20 percent. The Stoxx Europe 600 Index fell 1.5 percent and the euro weakened 1.4 percent to $1.3945.
Barclays Plc said it cut its exposure to Spain, Italy, Portugal, Ireland and Greece by 31 percent in the third quarter to 8 billion pounds ($12.8 billion).
Question marks linger over how easy it will be to increase the scope of Europe’s bailout fund, whether Greek investors will accept the losses on their holdings, and how Europe’s banks will choose to boost the ratio of the highest quality capital they hold, according to Alessandro Giansanti, a senior interest-rate strategist at ING Groep NV in Amsterdam.
“We are missing details,” he said. “It’s the level of absolute yields that is creating some panic among investors.”
China can’t provide a “cure” for Europe’s malaise, according to the Xinhua commentary. Japanese officials told the head of Europe’s bailout fund that the nation is willing to buy more bonds to aid the region, a government official told reporters in Tokyo today on condition of anonymity. The European Financial Stability Facility rescue fund said two days ago it may sell bills as part of a short-term strategy.
The EFSF plans to sell 3 billion euros of 10-year bonds to help finance the bailout of Ireland, according to a banker involved in the transaction.
Charles Dallara, managing director of the Institute of International Finance and chief negotiator for the lenders, said the organization is working with 40 to 45 companies that hold more than 80 percent of Greek government bonds. The agreement would affect about 206 billion euros of debt, he said at a news conference in Washington today.
The European Central Bank bought Italian and Spanish government bonds today, according to people familiar with the transactions, who declined to be identified because the trades are confidential. Even with ECB purchases, Italian 10-year yields are up 56 basis points this month, and Spanish yields have risen 41 basis points.
Belgian borrowing costs increased as the nation sold 2.16 billion euros of bonds today. The treasury auctions 10-year bonds at an average yield of 4.372 percent, more than the 3.751 percent when they were last sold in September. Bids dropped to 1.65 times the securities sold, from 1.8 times on Sept. 26.
As politicians negotiate over their crisis-fighting plans, signs economic growth is faltering may impair the ability of nations to reduce their debt levels.
A report today showed Italy’s jobless rate rose to 8.3 percent in September from 8 percent in August. The extra yield investors demand to hold Italian 10-year debt instead of German bunds widened to as much as 410 basis points today, approaching the euro-era record to 416 basis points reached on Aug. 5.
Other reports showed European unemployment increased to 10.2 percent in September from 10.1 percent in August, Portuguese industrial production slid and German retail sales increased 0.4 percent, less than the 1 percent advance forecast in a Bloomberg survey. Spanish gross domestic product stagnated in the third quarter, the central bank estimated today.
German bonds have returned 6.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian debt lost 4.5 percent. Spanish debt handed investors a 4.6 percent profit.