Italy, Spain Bonds Slump as Crisis Punctures Demand; Bunds Jump

Italian Bonds Slump After Missing Sales Target
Italy sold 5.73 billion euros of five- and 10-year debt, falling short of the maximum target of 6.25 billion euros. Photographer: Alessia Pierdomenico/Bloomberg

Italy’s bond yields surged to a four-month high as the nation missed its maximum target for sales of five- and 10-year securities, stoking concern that Europe’s financial woes are denting investor appetite for the debt.

Germany’s two-year yield reached zero for the first time. Five-, 10- and 30-year German bond yields fell to records as economic confidence in the euro area declined more than analysts forecast in May to the lowest in 2 1/2 years. Spanish bonds slumped, driving five-year yields to more than 6 percent for the first time since November, after Bank of Spain Governor Miguel Angel Fernandez Ordonez quit before his term expired amid criticism over the nationalization of Bankia group.

“Investors are becoming increasingly reticent to buy any more debt from these countries,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “Italy just about got the supply away. It echoes what we’re seeing in Spain and the ongoing worries about where this is heading. Things aren’t going to get better on their own.”

The Italian 10-year yield advanced 17 basis points, or 0.17 percentage point, to 5.93 percent at 5 p.m. London time. The rate reached 6.01 percent, the highest since Jan. 31. The 5 percent security due March 2022 tumbled 1.155, or 11.55 euros per 1,000-euro ($1,242) face amount, to 93.755. The five-year note yield jumped as much as 42 basis points to 5.68 percent, before easing to 5.56 percent.

Italian Auction

Italy sold 5.73 billion euros of five- and 10-year debt, falling short of the maximum target of 6.25 billion euros. The average yield on the five-year security was 5.66 percent, up from 4.86 percent at an auction of similar-maturity debt on April 27. The 10-year yield was 6.03 percent, from 5.84 percent last month.

“The auction results were not terribly satisfying,” said Achilleas Georgolopoulos, a fixed-income strategist at Lloyds Banking Group Plc in London. “The market grasped that they only raised 5.7 billion euros. Italian spreads are clearly widening.”

German 10-year yields fell nine basis points to 1.27 percent after dropping to 1.261 percent, the least since Bloomberg began tracking the data in 1989. German two-year yields slipped to zero, five-year yields declined to 0.362 percent, while 30-year rates slid to 1.802 percent.

Finnish and Dutch 10-year rates also fell to all-time lows as investors sought the euro-area’s safest assets.

Treasury 10-year note yields dropped to 1.6254 percent, the lowest ever. The euro fell to the least in almost two years against the dollar, declining as much as 0.9 percent to $1.2386.

Confidence Ebbs

An index of executive and consumer sentiment in the 17-nation euro area fell to 90.6 in May from a revised 92.9 in April, the European Commission in Brussels said today. That’s the lowest since October 2009 and below the 91.9 median forecast of 28 economists in a Bloomberg survey.

Ordonez met Spanish Prime Minister Mariano Rajoy yesterday, and the premier backed his decision to leave on June 10 instead of July 12, the Madrid-based Bank of Spain said in an e-mailed statement.

Spain’s 10-year yield climbed 21 basis points to 6.66 percent. It reached 6.70 percent, the most since Nov. 28. The two-year rate surged as much as 50 basis points to 5.13 percent, while five-year yields rose to an intraday high of 6.21 percent.

The yield difference, or spread, between Spanish 10-year government bonds and similar-maturity German bunds widened to as much as 5.41 percentage points, the most in the euro era.

It is “increasingly likely” that Spain will ask for external assistance, according to David Mackie, chief European economist at JPMorgan Chase & Co. in London.

Bailout Cost

A bailout package from the European Union and the International Monetary Fund that covers the government’s funding needs through the end of 2014 and includes cash for a bank recapitalization would amount to around 350 billion euros, he wrote in an e-mailed report to investors today.

The European Commission, the European Union’s central regulator, called for direct euro-area aid for troubled banks in policy recommendations released today.

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

The cost of insuring against default on Spanish sovereign bonds rose to a record. Credit-default swaps linked to Spain’s debt climbed 25 basis points to a 585, according to data compiled by Bloomberg.

German bonds maturing in more than a year returned 2.2 percent this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. That’s the most since they gained 3.1 percent in December. Spanish debt dropped 3.7 percent, while Italian securities lost 1.7 percent, the indexes show.

-- Editors: Paul Dobson, Nicholas Reynolds

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