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Spanish Yields Climb After Auction Shakes Faith in ECB Measures

April 6 (Bloomberg) -- Spanish 10-year yields posted their biggest weekly gain since January as borrowing costs rose at an auction and Prime Minister Mariano Rajoy admitted the nation’s economy is in “extreme difficulty.”

Spain’s 10-year bonds dropped for a fourth time in five weeks as the International Monetary Fund said the nation faces “severe” challenges, stoking concern the euro-region will be unable to stem its debt crisis. German bunds advanced for a third week as investors sought the safety of Europe’s benchmark debt amid concern the European Central Bank’s longer-term refinancing operations are proving insufficient to end the turmoil. German two-year yields fell to a record.

“The most notable development this week was the very poor performance of Spain in the wake of a soft set of auction results,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “Significant pressure saw Spanish 10-year yields reach a new post-LTRO high, underpinning concern that the positive effects of the ECB’s aggressive liquidity provisioning are waning and giving way to speculation that contagion risks are returning.”

The yield on Spanish 10-year bonds climbed 40 basis points to 5.75 percent for the week at 4:25 p.m. London time yesterday in a holiday-shortened week. The 5.85 percent bond due January 2022 changed hands at 100.71 percent of face value. The additional yield investors demand to hold Spanish 10-year bonds instead of similar-maturity bunds jumped to as much as 410 basis points, the widest since Nov. 30.

Bund Yields

German 10-year bund yields fell six basis points to 1.73 percent. The five-year yield slid to 0.711 percent, the least since Bloomberg began collecting the data in 1990.

The two-year yield touched 0.13 percent, also the lowest since 1990.

Spain sold 2.59 billion euros ($3.38 billion) of bonds, just above the minimum amount it planned for the auction on April 4.

Spanish 10-year yields yesterday rose to the highest level since the ECB started providing three-year loans in December to stem the turmoil. ECB President Mario Draghi said the euro-region’s economic outlook remains subject to “downside risks.”

Germany is scheduled to sell 5 billion euros of 10-year bunds on April 11. Italy plans to auction treasury bills the same day, as well as notes and bonds on April 12.

“In light of the Spanish auction results, focus will be on next week’s Italian and German supply,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London.

European government bond trading resumes on April 10.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

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