Spanish Yields Surges as Greek Vote Fails to Damp Concern

Spanish bonds slid, propelling 10-year yields to more than 7 percent, after yesterday’s Greek election failed to convince investors that politicians will be able to tame Europe’s financial woes.

Italian debt also fell and German bunds rose, reversing earlier declines. Spain’s yields climbed to euro-era records as a report today showed the nation’s bad loans increased in April. The securities tumbled last week after the bloc’s fourth-largest economy requested as much as 100 billion euros ($126 billion) of aid on June 9 to support its banks. Greek bonds rose after pro-bailout parties won enough seats to control parliament.

“The spotlight is now back on Spain,” said Christian Reicherter, a Frankfurt-based analyst at DZ Bank AG. “The market is worried about the bad loans at the Spanish lenders, which is pressuring the bonds. This goes to show that the European debt crisis isn’t solved and we expect bunds to remain well supported.”

Spain’s 10-year yield climbed as much as 41 basis points to 7.29 percent, the most since the euro was introduced in 1999. It was 28 basis points higher at 7.16 percent at 4:44 p.m. London time. The 5.85 percent security due January 2022 sank 1.835, or 18.35 euros per 1,000-euro face amount, to 91.085.

Five-year note yields climbed 42 basis points to 6.55 percent and rates on 30-year bonds jumped 22 basis points to 7.22 percent, also euro-era records.

Bad Loans

The yield on Germany’s 10-year bund, Europe’s benchmark government debt security, slid three basis points to 1.41 percent after jumping as much as 11 basis points to 1.55 percent. The nation’s one-year yield dropped below zero for the first time since May 30 and the euro fell 0.5 percent to $1.2571.

Spain became the fourth euro member to seek a bailout since the debt crisis began almost three years ago when it asked for aid to rescue its lenders earlier this month. The 7 percent threshold on 10-year bonds helped trigger sovereign bailouts for Greece, Ireland and Portugal.

Bad loans as a proportion of total lending at Spain’s financial institutions jumped to 8.72 percent in April from 8.37 percent in March, the Bank of Spain said on its website.

“Seven percent for Spain is not unsustainable, it is uncomfortable,” Holger Schmieding, chief economist at Berenberg Bank, said in an interview on Bloomberg Television’s “The Pulse” with Maryam Nemazee. “The risk is always that it doesn’t stop at 7 percent -- that it goes to 8 and 9 percent and then we would have a full-blown panic.”

Yield Premium

The extra yield investors demand to hold the Spanish securities instead of German bunds expanded to as much as 589 basis points, or 5.89 percentage points, today, the most since the euro’s start.

The difference between the bid yield and offer yield on 10-year Spanish bonds, an indicator of market liquidity, widened to more than 10 basis points, the most in at least 30 days, according to data compiled by Bloomberg, before narrowing to nine basis points. The bid-offer spread was half of one basis point for German securities of similar maturity.

Spain’s two-year notes also slumped, pushing the rate on the securities up as much as 60 basis points to 5.59 percent, the most since Nov. 30. The nation’s Treasury plans to sell as much as 2 billion euros of debt due in 2014, 2015 and 2017 on June 21. It will sell up to 3 billion euros of 364-day and 539-day Treasury bills tomorrow.

Greek Coalition

Italy’s 10-year yield climbed as much as 25 basis points to 6.17 percent. The spread over bunds widened to 478 basis points.

Spanish bonds were the most volatile in euro-area markets, as measured by 10-year yields, the two-, 10-year yield spread and credit-default swaps.

The New Democracy party won 129 seats in Greece’s election, enough to put together a majority coalition with third-placed Pasok, according to final results. Leader Antonis Samaras now begins his second bid in six weeks to build a coalition as euro-area finance chiefs pressure him to form a government that will keep bailout aid flowing.

European officials indicated a willingness to ease the terms of rescue loans as long as Greece, with just weeks of cash in the bank, recommits to their austerity demands. German Chancellor Angela Merkel today said there could be no leeway on Greece’s commitments. She spoke with reporters in Los Cabos, Mexico, as Group of 20 leaders gathered for a summit.

Ratings Risk

Greece’s 2 percent security due February 2023 advanced for a fourth day, with the yield sliding 83 basis points to 26.30 percent.

Fitch Ratings said the election results remove the immediate risk of euro-zone rating cuts. Fitch said on May 17 it would place all of the region’s sovereigns on Rating Watch Negative following the weekend poll if the risk of a Greek exit from the common currency was probable in the near term.

Officials from the G-20 will discuss a mix of measures to secure the global recovery that will include deficit reduction for some countries and pledges for additional stimulus by others with sounder finances, a Canadian official said.

Host President Felipe Calderon said yesterday that world leaders will agree to boost the $430 billion firewall the International Monetary Fund announced in April.

German bunds handed investors a return of 3.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds have gained 6.9 percent and Spanish debt has lost 6 percent, the indexes show.

Since the last day of trading before Greece’s first election on May 6, German securities have gained 1.3 percent, while Spanish bonds have declined 5.4 percent and Italian securities have dropped 3 percent.

Italian government bond futures contracts expiring in September fell 0.9 percent to 98.33, extending last week’s 1.1 percent drop.

A break under 98.18, which is the midpoint of the recent rally from 96.21 to 100.15, will “trigger a resumption of the bearish trade” and “retest” the low of 96.21 reached on June 14, Richard Adcock, head of fixed-income technical strategy in London at UBS AG in London, wrote in a note to clients.

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