Spain’s Bond Yield Reaches Euro Record After Downgrade

Spain Yield Reaches Euro Record as Rating Cut Before Italy Sale
A Metro sign for the 'Banco de Espana' station, is seen near to the Bank of Spain. Photographer: Angel Navarrete/Bloomberg

Spain’s bonds fell, with 10-year yields rising to a euro-era record, after Moody’s Investors Service cut the nation’s credit rating, citing its rising debt burden and weakening economy.

Spain’s securities extended this week’s decline after the nation requested as much as 100 billion euros ($126 billion)of aid for its banks last weekend and after Prime Minister Mariano Rajoy said he would “battle” the European Central Bank for cheap loans to avoid a sovereign bailout. Italy’s bonds rose after the nation raised its maximum target at a sale of 4.5 billion euros at an auction even as its borrowing costs surged.

The “markets are telling us that they’re unconvinced by the bank bailout and that the next step is that the government will have to concede, capitulate, and go for a sovereign loan,” James Stewart, head of macro research at AX Markets in London, said in an interview with Mark Barton on Bloomberg Television’s “Countdown.” “That seems to me quite likely, and even now I think it’s moving on from Spain to Italy.”

Spain’s 10-year yield climbed 16 basis points, or 0.16 percentage point, to 6.92 percent at 5 p.m. London time after rising to 6.998 percent, the highest since the euro was introduced in 1999. The 5.85 percent bond due in January 2022 fell 1.07, or 10.70 euros per 1,000-euro face amount, to 92.64. The yield has jumped 70 basis points this week.

The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity bunds widened 16 basis points to 543 basis points after reaching 551 basis points, also a euro-era record.

Moody’s Cuts

Moody’s lowered Spain’s credit rating to Baa3, one step above junk, from A3 and put it on review for a further downgrade. The request for aid from the European Union to recapitalize its banking system adds to the government’s debt load, the rating company said yesterday.

Moody’s also lowered Cyprus’s bond rating, saying there was a rising likelihood of a Greek exit from the euro area, and a increase in the probable amount of support the government may have to extend to Cypriot banks.

Greece will hold an election on June 17 that may lead to it becoming the first nation to exit the 17-nation currency union.

Rajoy yesterday called for the ECB to buy Spanish government debt to ease the government’s interest costs in a letter to European Commission President Jose Manuel Barroso.

“That is the battle we have to wage in Europe,” Rajoy told Parliament in Madrid. “I am waging it.”

German 10-year yields were little changed at 1.49 percent. They dropped to a record 1.127 percent on June 1.

Bank Borrowing

Spanish lenders’ net average borrowings from the ECB rose to a record 287.8 billion euros in May from 263.5 billion euros in April, Bank of Spain data showed today.

While a 10-year yield of seven percent “is a psychologically significant level for the market, it isn’t necessarily for Spain’s funding program,” Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London, said in an interview with Guy Johnson on Bloomberg Television’s “The Pulse.” “It only reinforces a further selloff when people see a 7 percent level.”

Italy’s 10-year yield fell nine basis points to 6.13 percent, after advancing to 6.34 percent, the highest level since Jan. 20.

The nation sold 3 billion euros of three-year notes at an average yield of 5.30 percent, up from 3.91 percent at the previous auction on May 14. Investors bid for 1.59 times the amount allotted, versus 1.52 times last month. It sold 4.5 billion euros of debt in total, meeting its maximum target.

Yield Trend

“These auctions will be judged a success in the short term, but the trend in yields and spreads is something which requires something from the policy-maker level to reverse,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London.

The trend in Italy’s government bond futures is “bearish while they trade below the 99.32 mid-point” of their decline from 102.21 on June 7 and the low of 96.43 on June 12, Richard Adcock, head of fixed-income technical strategy in London at UBS AG in London, wrote in a note to clients. “As long as this remains the case the expectation is for limited bounces and further price weakness.”

The contracts rose 0.8 percent to 97.84 after dropping as much as 0.9 percent to 96.21.

Spanish bonds have handed investors a loss of 5.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German debt returned 2.5 percent, and Italian bonds rose 5.4 percent.

Volatility of French bonds was the highest in the euro-area markets today followed by Spain and Austria, according to measures of 10-year debt, the spread between two- and 10-year securities and credit-default swaps.

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