Spain Bonds Drop on Strike as Italy Yields Jump Most in 2 Months

Spanish bonds fell and Italian notes slid by the most in two months as industrial action in the Iberian nation highlighted the challenges facing euro-area governments as they seek to cut costs and reduce deficits.

Italy’s securities declined as it sold 8 billion euros ($10.6 billion) of five- and 10-year debt. German 10-year bunds rose for a third day as a report showing European confidence weakened boosted demand for safety. Spain’s Budget Minister Cristobal Montoro presents the 2012 budget tomorrow, which aims to reduce the deficit even as the economy contracts. Greece may have to restructure its debt again, Moritz Kraemer, head of sovereign ratings at Standard & Poor’s, said yesterday.

“The economic situation in Spain is gloomy,” said Sercan Eraslan, a fixed-income strategist at WestLB AG in Dusseldorf, Germany. “That’s the main driver today for Spanish and Italian debt. S&P’s warning on Greece” fueled bets the crisis may spread, he said.

Spain’s 10-year bond yield climbed 13 basis points, or 0.13 percentage point, to 5.46 percent at 4:49 p.m. London time after rising as much as 18 basis points to 5.50 percent. That’s the biggest daily increase since March 21. The 5.85 percent bond due in January 2022 fell 1.02, or 10.20 euros per 1,000-euro face amount, to 102.88.

The nation’s two-year note yield also rose 13 basis points, to 2.59 percent.

Union Demands

Unions said 77 percent of Spanish workers took part in the strike, angered by Prime Minister Mariano Rajoy’s austerity measures. The government “will not cede” to demands to retract labor-rule changes, Montoro said yesterday.

The additional yield investors demand to hold Spain’s 10-year bonds instead of German bunds widened to as much as 369 basis points, the most since Feb. 16.

Italy’s 10-year yield climbed 10 basis points to 5.21 percent, increasing the spread over bunds by 13 basis points to 340 basis points. The gap has widened from its 2012 low of 276 basis points set on March 16.

The nation’s two-year yield jumped as much as 39 basis points to 3.03 percent, the biggest increase since Jan. 16, before dropping back to 2.99 percent.

Italy sold 3.25 billion euros of bonds maturing in September 2022 at a yield of 5.24 percent, compared with 5.5 percent at the previous auction on Feb. 28. Investors bid for 1.65 times the amount allotted, versus a bid-to-cover of 1.40 times last month. The nation also auctioned debt maturing in May 2017 and floating-rate securities due in June 2017.

‘Key Events’

Volatility in Italian government debt was the highest in euro-area markets today, followed by German securities, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

“There’s absorption of the supply to take into account,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “We have a few political key events coming up, with the euro finance ministers’ meeting, Spain’s fiscal update and Italy’s labor market reforms. There’s still some uncertainty with regards to what happens over the next few days.”

European finance ministers will meet tomorrow in Copenhagen to discuss measures to counter the region’s debt crisis.

Another reorganization of Greek debt may involve partners such as European governments, S&P’s Kraemer said in London yesterday. There may be “down the road, I’m not predicting today when, another restructuring of the outstanding debt.”

Greece’s bond maturing in February 2023 fell, driving the yield up 33 basis points to 20.64 percent. The price dropped 0.54 to 24.045 percent of face value.

Confidence Declines

Bunds advanced after a report showed economic confidence in the euro area unexpectedly declined in March, adding to concern the region’s economy is struggling to recover.

The 10-year bund yield dropped three basis points to 1.81 percent after falling to 1.80 percent, the least since March 13.

An index of executive and consumer sentiment in the 17-nation bloc fell to 94.4 from a revised 94.5 in February, the European Commission said in Brussels. Economists surveyed by Bloomberg News forecast a gain to 94.5 from a previously reported 94.4. The number of people in Germany out of work fell a seasonally adjusted 18,000 to 2.84 million in March, the German Federal Labor Agency said today.

Ten-year bund futures may advance to the highest since March 12 should they break above a key level of so-called resistance, Helaba Landesbank Hessen-Thueringen said, citing trading patterns.

Contract High

The contract “firmed yesterday and surpassed the resistance in the 137.70-75 range,” Viola Stork and Ulrich Wortberg, analysts at Helaba in Frankfurt, wrote in an e-mailed report. “A rise above 138.14 would boost the situation further and create scope for a test of the current contract high of 139.06,” they wrote. Resistance refers to an area where technical analysts anticipate sell orders may be clustered.

The 10-year contract expiring in June climbed 0.4 percent to 138.29 after rising to 138.43, the highest level since March 13. It last reached 139.06 on March 12, according to data compiled by Bloomberg.

German bunds are little changed in 2012, their worst quarterly performance in a year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portuguese bonds returned 14 percent, with Italian securities earning 11 percent, the indexes show.

Portuguese two-year notes fell for the first time in 11 days today, ending their longest run of gains since February 2009. The rate jumped 25 basis points to 9.62 percent.

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