Spanish, Italian Bonds Slide on Debt Concerns; Bunds Advance

Spanish and Italian bonds slid after Italy’s borrowing costs surged to the highest level since June 1997 at a note sale, fueling concern the region’s debt crisis is worsening.

The extra yield investors demand to hold Spanish bonds instead of German bunds widened to a euro-era record after European Central Bank Governing Council member Jens Weidmann suggested policy makers should end their support of the region’s most indebted nations. Europe’s banks need to sell more Italian bonds to avoid being sucked into the debt crisis, said Christian Clausen, president of the European Banking Federation. German two-year yields dropped to a record low.

“The investor community is preparing for further setbacks,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. Seeing Italian yields “above 7 percent last week did a lot of damage and there will be a lot of pending desire to offload here. The demand for safe-haven assets is on the front foot.”

Ten-year Spanish yields climbed 25 basis points, or 0.25 percentage point, to 6.11 percent at 5 p.m. London time, surpassing 6 percent for the first time since the European Central Bank was said to start buying the nation’s debt on Aug. 8. The 5.5 percent notes due in April 2021 fell 1.76, or 17.60 euros per 1,000-euro face amount, to 95.7-5.

The spread over German bunds widened 36 basis points to 432 basis points. Spain’s 30-year yields reached 6.74 percent, the most since Bloomberg began collecting the data in 1998.

Swaps at Record

Credit-default swaps protecting Spain’s government bonds rose 21 basis points to a record 441, according to CMA prices.

Italian bonds fell for the first time in three days, pushing the 10-year yield 25 basis points higher to 6.70 percent, approaching the euro-era record 7.48 percent set Nov. 9. The difference in yield between 10-year Italian and German bonds expanded by 36 basis points to 492 basis points. It reached a record 575 basis points on Nov. 9.

Italy’s Treasury sold 3 billion euros ($4.1 billion) of notes due in September 2016 at a yield of 6.29 percent, the highest since June 1997 and up from 5.32 percent at the previous auction on Oct. 13. Demand increased to 1.47 times the amount on offer, from 1.34 times last month.

Spain is scheduled to auction as much as 3.5 billion euros of bills maturing in 12 months and 18 months tomorrow, before offering up to 4 billion euros of bonds due 2022 on Nov. 17.

Spanish Supply

“Spain is trading quite closely in line with Italy so suffering the same ups and downs, but you also have to remember the prospect of Thursday’s supply, which is going to be weighing on the market,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London.

Spanish bank borrowing from the ECB rose to 76 billion euros in October, the highest level since September 2010, data published by the Bank of Spain today showed.

Slovakia accepted no bids from investors at a sale of five-year notes today.

Yields on Italian securities rose to the highest in the euro’s history last week in a slump that was only stemmed after Prime Minister Silvio Berlusconi agreed to push through austerity measures and then step down. Italian President Giorgio Napolitano offered former European Union Competition Commissioner Mario Monti the opportunity to head a new government yesterday, aiming to boost confidence in the nation’s ability to cut its debt levels.

‘Reducing Their Risk’

“The banks are doing exactly what they should be doing: they are reducing their risk,” Clausen, who is also the chief executive officer of Nordea Bank AB, said in an interview in Stockholm. “They should keep doing what they are doing. The banks are actually moving out of the epicenter.”

Italian bonds declined even as the ECB was said to purchase the securities today, according to three people familiar with the transactions who declined to be identified because the deals are confidential. The ECB settled 4.48 billion euros of bond purchases in the week through Nov. 11, down from 9.5 billion euros the previous week, it said today.

“The co-option of monetary policy for fiscal needs must come to an end,” the ECB’s Weidmann said in a speech at a conference in Frankfurt. The increasing pressure on the central bank to act “lessens the imperative” on leaders to implement the “necessary measures,” he said.

Bunds Gain

German bunds rose for the first time in three days after the European Union’s statistics office said production in the 17-nation euro area tumbled 2 percent in September from August. That’s the biggest drop in 2 1/2 years.

The two-year yield fell to 0.32 percent, the lowest since at least 1990. The 10-year yield declined 10 basis points to 1.79 percent.

The yield spread between German bonds and Belgian securities widened to as much as 282 basis points, the most since the euro’s creation. The French-German spread increased 15 basis points to 165 basis points, and the Austrian-German yield difference climbed 15 basis points to 164 basis points.

Bunds have returned 8.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds have lost 7.2 percent, and Spanish securities have gained 1.6 percent.

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