Spanish Notes Fall for Third Day as Merkel Rejects Common Bonds

Italian Bonds Rise After Auction as Rajoy Calls for More Urgency
Italian bonds advanced even as the nation’s borrowing costs increased at the bill auction. Photographer: Alessia Pierdomenico/Bloomberg

Spanish notes dropped for a third day as German Chancellor Angela Merkel rejected common euro bonds, fueling concern European leaders will fail to bridge their differences over the debt crisis at a summit this week.

Spain’s two-year yields approached the highest since November as Merkel said euro bonds, euro bills and debt redemption funds were unconstitutional in Germany and “counterproductive.” Spanish and Italian bonds rose earlier after Spain’s Prime Minister Mariano Rajoy said he would call for more urgency from leaders at the two-day meeting starting tomorrow in Brussels. German bunds declined for a second day.

“There’re still too many divisions among the key players, and I don’t think we are going to get that much traction” at the summit, said Philip Tyson, a strategist at ICAP Plc in London, speaking on Bloomberg Television’s “The Pulse” in an interview with Guy Johnson. “That will leave Italian, Spanish and other peripheral bonds highly vulnerable.”

Spain’s two-year yield increased 18 basis points, or 0.18 percentage point, to 5.40 percent at 4:17 p.m. London time after rising to 5.59 percent on June 18, the highest since Nov. 30. The 3.4 percent note due in April 2014 declined 0.28, or 2.80 euros per 1,000-euro ($1,247) face amount, to 96.60.

The 10-year yield climbed five basis points to 6.92 percent after jumping 49 basis points over the previous two days.

‘Adequate Oversight’

“Oversight and liability have to go hand in hand,” Merkel told lower-house lawmakers in Berlin, three hours after Rajoy made his plea for help from the European summit. “There can only be joint liability when adequate oversight is ensured.”

The summit will grapple with “developing a vision for the economic and monetary union to ensure stability and sustained prosperity,” according to a paper released yesterday by four officials led by European Union President Herman Van Rompuy.

Italian two-year notes advanced after the nation raised its maximum amount at a bill auction.

The Rome-based Treasury sold 185-day bills at a yield of 2.957 percent, up from 2.104 percent on May 29. Investors bid for 1.62 times the amount offered, versus 1.61 times last month.

Italy plans to sell as much as 2.5 billion euros of five-year notes, and up to 3 billion euros of 10-year bonds tomorrow.

Italy’s two-year yield dropped seven basis points to 4.60 percent. The 10-year rate was little changed at 6.20 percent.

Bunds Fall

German bunds dropped after Egan Jones Ratings Co. cut the nation’s credit ranking to A+ from AA- yesterday, saying Merkel had caused tension among European Union members by resisting calls for joint euro bonds.

“Bunds are coming under pressure as there is a realization that in the end Germany may have to absorb a bigger burden than previously envisaged as the crisis deepens,” said Charles Berry, a bond trader at Landesbank Baden-Wuerttemberg in Stuttgart. “That doesn’t look good for the credit outlook.”

The 10-year bund yield climbed six basis points to 1.57 percent after dropping to a record 1.127 percent on June 1.

German inflation, calculated using a harmonized EU method, slowed to 2 percent in June from 2.2 percent the previous month, the Federal Statistics Office said today in Wiesbaden.

The German five-year break-even rate, a gauge of inflation expectations derived from yield difference between regular and index-linked bonds has fallen to 0.66 percentage point from 1.75 percentage points at the end of March.

Spanish bonds handed investors a loss of 6.5 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German debt rose 2.6 percent, and Italian securities gained 5.7 percent.

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

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