Spanish borrowing costs jumped to the most in the history of the euro as European government bonds slumped on concern policy makers aren’t doing enough to prevent the currency bloc’s financial woes from deepening.
French securities slid with benchmark German bunds as Fitch Ratings said it may cut credit grades across Europe because policy makers are failing to demonstrate they can bring the debt crisis under control. The yield on Italian 10-year securities jumped to the most since January as the country prepared to sell bonds on June 14. Germany will offer 10-year bunds, Europe’s benchmark securities, tomorrow, after Austria and the Netherlands auctioned debt today.
“People are getting frustrated, there is disaffection with Europe and the situation is not getting any clearer for investors,” said Gianluca Ziglio, an interest-rate strategist at UBS AG in London. “Many are deciding that they would rather stay out of the market for a while, even in the core countries.”
Spain’s 10-year yield rose 20 basis points, or 0.2 percentage point, to 6.71 percent at 5 p.m. London time, after reaching 6.83 percent, the highest since the euro was introduced in 1999. The 5.85 percent bond maturing in January 2022 fell 1.325, or 13.25 euros per 1,000-euro ($1,246) face amount, to 93.030.
Ratings in the currency bloc, including those of AAA nations, are under “strong downward pressure,” Fitch Managing Director Ed Parker said in Oslo today. If there’s “no light at the end of the tunnel soon,” the risk of a breakup of the 17-member euro area will rise, he said. “Last minute” solutions are raising the cost of managing the crisis, he said.
Spanish bonds extended their drop after Fitch downgraded 18 of the nation’s banks today.
German bunds declined, with the 10-year yield rising 12 basis points to 1.42 percent. Germany will auction as much as 5 billion euros of the bonds as well as inflation-linked debt maturing in April 2018 tomorrow.
Spain’s bonds fell yesterday after the nation sought as much as 100 billion euros of financial support for its banks, raising concern that investors holding government debt will rank behind official creditors in the queue for repayment.
Standard & Poor’s said the request for a bailout “has no immediate effect” on Spain’s BBB+ credit rating.
Before the aid was announced, Moody’s Investors Service said it may review the ratings of euro-area nations as Spain’s government tried to complete the cleanup of its lenders and concern mounted that Greece could leave the currency bloc after elections on June 17.
Japanese rating company R&I cut Spain to BBB+ from A today, citing a decline in financing capacity.
The “disappointing market reception” to the Spanish bank aid package suggests investors are losing confidence in policy makers, Mohamed El-Erian, chief executive officer of Pacific Investment Management Co. in Newport Beach, California, wrote on CNBC’s website yesterday.
Italian 10-year securities dropped for a fifth day. The yield increased 14 basis points to 6.17 percent after climbing to 6.30 percent, the highest since Jan. 25.
Austrian Finance Minister Maria Fekter told reporters in Vienna today that Italy is able to refinance its debt through capital markets, be it at “very high prices.” Yields at 6 percent “have to be looked at closely,” Fekter said, adding that it would receive aid if needed. The nation is due to auction bonds maturing between 2015 and 2020 in two days.
“Italy is coming more under pressure,” said Allan von Mehren, a fixed-income strategist at Danske Bank A/S in Copenhagen. “The focus has returned to the euro region’s problems, particularly Italy’s debt burden.”
The European Central Bank has done its job to buy time for governments to fix weaknesses in the euro’s foundations, Bundesbank board member Andreas Dombret said.
“To those who ask what else the euro system can do, I say that we have done our part, now it’s up to the political leaders to deliver on the fiscal and structural policy side,” Dombret said in an interview in London yesterday.
The ECB bought Spanish and Italian government bonds last year, using its Securities Markets Program, to try to stop the debt crisis from spreading to the euro region’s third- and fourth-biggest economies. The program was put on hold earlier this year after the central bank supplied 1 trillion euros of three-year loans to euro-area banks in December and February.
Ten-year Dutch bond yields rose 14 basis points to 1.98 percent after the Netherlands sold 1.65 billion euros of securities maturing in January 2033. The government planned to sell as much as 2.5 billion euros of the debt.
Volatility on Finnish bonds was the highest in euro-area markets, followed by French debt, according to measures of 10-year debt, the spread between two- and 10-year securities and credit-default swaps. Finland’s 10-year yield jumped 13 basis points to 1.78 percent.
German debt has returned 3.9 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities have lost 4.5 percent, and Italian bonds rose 7 percent.