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Spanish Yields Climb to 5-Month High on Greece Concern

Spanish 10-year bond yields rose above 6.3 percent for the first time in more than five months as Greece moved closer to a possible exit from the euro area and German Chancellor Angela Merkel’s party lost a state election.

German, Finnish and Dutch yields reached record lows as investors favored the highest-rated countries. The cost of insuring against a sovereign default by Spain rose to an all-time high. Italian 10-year yields jumped by the most since January as a report showed euro-area industrial production unexpectedly contracted in March. Data tomorrow may show the region’s economy shrank in the first quarter.

“The political deadlock in Greece continues to push risk premiums higher and Spanish bonds continue to fall,” said Achilleas Georgolopoulos, a fixed-income strategist at Lloyds Banking Group Plc in London. “Everything plays into the hands of risk-off.”

Spanish 10-year yields gained 22 basis points, or 0.22 percentage point, to 6.23 percent at 4 p.m. London time. It touched 6.36 percent, breaching the 6.3 percent level for the first time since Nov. 30. The 5.85 percent security fell 1.56, or 15.60 euros per 1,000-euro ($1,285) face amount, to 97.275.

The Italian 10-year yield was 20 basis points higher at 5.71 percent, after rising as much as 28 basis points, the biggest intraday increase since Jan. 30. Two-year note yields rose 32 basis points to 3.32 percent, after climbing as much as 42 basis points, the most since Jan. 16.

Political Deadlock

Credit-default swaps on Spain surged 24 basis points to a record 541 basis points amid heightened concern over the nation’s bank capital crisis. Spain’s plan to force banks to increase provisions by 30 billion euros and inject less than 15 billion euros of cash will worsen its debt burden and may not be enough, Moody’s Investors Service said.

Greece’s political deadlock entered a second week as President Karolos Papoulias prepared to meet political leaders after failing to win agreement on a unity government. Merkel’s party was defeated in an election in the country’s most-populous state.

“Merkel will remain focused on fiscal austerity and try to convince the German public that she is right,” Georgolopoulos said. Euro-area finance ministers were due meet in Brussels today.

Greece’s 2 percent bond due February 2023 fell for a 10th day, pushing the yield up 292 basis points to 27.67 percent. The price dropped to 15.73 percent of face value.

Holding the Line

While a Greek withdrawal from the euro area “is not necessarily fatal,” it is not attractive, European Central Bank Governing Council member Patrick Honohan said in Tallinn, Estonia, on May 12. An exit was “technically” possible yet would damage the euro, he said.

Volatility in Greek debt securities was the highest in the euro area, followed by Ireland and Italy, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps compiled by Bloomberg. The yield on Irish bonds due October 2020 increased 11 basis points to 7.03 percent.

Greece plans to sell 1 billion euros of three-month bills tomorrow, while Belgium is scheduled to auction three- and 12-month securities.

German Finance Minister Wolfgang Schaeuble reiterated in an interview in Sueddeutsche Zeitung over the weekend that member states seeking to hold the line on austerity for Greece could not force the country to stay in the bloc.

German Records

German two-, five-, 10- and 30-year yields fell to all-time lows. The 30-year bond yields dropped as much as 13 basis points to 2.072 percent. Ten-year rates slid to as low as 1.434 percent and five-year yields slipped to 0.479 percent. Two-year yields touched 0.055 percent.

The Dutch 10-year yield declined as much as eight basis points to 1.95 percent, while Finland’s securities with a similar maturity climbed for a third day, pushing the yield to as low as 1.79 percent.

“The rally to new yield lows in bunds is not done” and the 10-year yield may fall to 1.25 percent, Andrew Roberts and Harvinder Sian, strategists at Royal Bank of Scotland Group Plc in London, wrote in a note today. The debate about the possibility of a euro member exiting the monetary union “is now finally in the open,” they wrote.

Rally ‘Not Done’

Production in the 17-nation euro area decreased 0.3 percent from February when it rose a revised 0.8 percent, the European Union’s statistics office in Luxembourg said today. The median prediction of 34 analysts in a Bloomberg News survey was for a gain of 0.4 percent.

Economic growth in the euro-region contracted 0.2 percent in the first quarter, according to the median estimate of 38 economists in a Bloomberg survey, after shrinking 0.3 percent in the previous three months. The data is released tomorrow.

Longer-maturity German bonds outperformed shorter-dated notes with the difference in yields between two- and 10-year bunds shrinking to the narrowest in more than six months.

The spread narrowed five basis points to 138 basis points, the least since Nov. 1, according to data compiled by Bloomberg based on closing prices. It may find resistance at the November low of 133 basis points, and encounter support at the 200-day moving average at 158 basis points, the data show.

Support refers to an area on a price graph where analysts expect orders to buy the spread to be grouped. A resistance level is an area where they anticipate sell orders will be clustered.

German debt has returned 2.3 percent so far this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds have gained 10 percent, and Spanish securities have lost 2.1 percent, the data show.

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