Spain’s bond yields surged the most since the euro was created in 1999 this week after the nation requested aid for its banks and asked the European Central Bank for more financial support.
Bunds slumped amid concern Germany will need to increase borrowing to support its struggling neighbors as Moody’s Investors Service cut Spain’s credit rating to one step above junk. Spanish 10-year yields approached 7 percent after Prime Minister Mariano Rajoy published a letter to European Union leaders on June 13 saying the ECB should help countries trying to shore up their finances. Greek bonds rose before tomorrow’s election that may determine its future in the euro region.
“The market is saying that the problems in Spain extend beyond the banks,” said John Davies, a fixed-income strategist at WestLB AG in London. “The Moody’s downgrade put the icing on the cake for Spanish bonds. There’s a growing sense that if policy makers want to save the single currency then Germany may have to open up to the idea of euro bonds and if that’s the case then bund yields will need to rise.”
Spain’s 10-year yield rose 67 basis points, or 0.67 percentage point, this week to 6.89 percent at 4:45 p.m. London time. The 5.85 percent bond due January 2022 changed hands at 92.855 percent of face value.
German 10-year bunds fell for a second week with the rate climbing 11 basis points to 1.44 percent.
The rate on Spanish 10-year bonds jumped to 6.998 percent on June 14, a euro-era record. Deputy Prime Minister Soraya Saenz de Santamaria yesterday said Europe’s fourth-largest economy has to cut its budget deficit because it can’t afford to pay the interest rates the market is demanding. It plans to sell debt due in 2014, 2015 and 2017 on June 21.
Bunds slid amid speculation global policy makers will take coordinated action to combat the risks from Europe’s debt crisis. Leaders from the Group of 20 nations meet June 18-19.
The Greek ballot will turn on whether voters accept austerity to stay in the euro or reject the conditions of a bailout and risk exiting the 17-member currency. Greece’s 2 percent bond maturing in February 2023 rose for a second week, with the yield sliding 1788 basis points to 27.15 percent.
Voting ends at 7 p.m. tomorrow Athens time with a first official result estimate due around 9:30 p.m.
Spanish debt has handed investors a loss of 1.1 percent through the month to June 14, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German securities have lost 2 percent and Italian bonds declined 0.9 percent.