Spain Bonds Have Weekly Drop Amid Aid-Request Speculation

Spain’s 10-year bonds had a weekly decline as the nation held off from seeking a bailout that would enable the European Central Bank to buy its debt.

The securities erased an intra-day decline, and the market closed before stress tests conducted by management consultants Oliver Wyman showed Spain’s banks have a combined capital shortfall of 59.3 billion euros ($76.3 billion). German bunds extended their longest run of quarterly gains since 1998 even as a report showed euro-area inflation accelerated in September. French bonds rose for the first week since August as President Francois Hollande’s government delivered its budget.

“People are closing the week thinking there will be a request for aid over the weekend,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “That time-frame seems too quick for me and I think the rumors are unsubstantiated.”

Spain’s 10-year yield ended the day little changed at 5.94 percent. It earlier rose as much as 12 basis points, or 0.12 percentage point, to 6.06 percent. The price of the 5.85 percent security maturing in January 2022 was at 99.83. The yield rose 18 basis points in the week, the biggest increase since Aug. 31. The two-year rate rose seven basis points to 3.43 percent, extending the weekly increase to 30 basis points.

Spanish Banks

The Bankia group, a nationalized lender, had a 24.7 billion-euro capital deficit in the Oliver Wyman tests. Banco Popular Espanol SA had a 3.22 billion-euro shortfall. Of 14 lenders showed, seven banks had no capital deficit. Spain commissioned the study as part of the conditions agreed in July for a European bailout of as much as 100 billion euros for its banking system.

The front German bund futures contract slipped 0.1 percent after the results of the stress test to 141.43. They earlier climbed to as high as 141.95.

Moody’s Investors Service said on Aug. 30 that it would probably extend its review of Spain’s credit rating, which started June 13, through the end of this month.

ECB President Mario Draghi unveiled details of the central bank’s asset-purchase plan on Sept. 6, saying activation was dependent on countries asking for help. The ECB will target government bonds with maturities of one to three years, including longer-dated debt that has a residual maturity of that length, Draghi said.

Spain’s government won’t decide whether to request aid until it has all the relevant information available and has had time to study it, Spanish Economy Minister Luis de Guindos said yesterday.

Cat, Mouse

“Spain has been playing cat and mouse with the ECB, saying they may not need to apply for aid.,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London.

Without an application for aid, 10-year Spanish yields will rise toward 6.5 percent, Ostwald said.

Consumer prices in the 17-nation euro region increased 2.7 percent from a year earlier after a 2.6 percent gain in August, the European Union’s statistics office in Luxembourg said in an estimate today. The median forecast of 40 economists in a Bloomberg News survey was for the rate to fall to 2.4 percent.

Germany’s 10-year yield declined two basis points to 1.44 percent, after touching 1.42 percent, the lowest since Sept. 5. The yield dropped seven basis points since the end of June, having fallen in each of the past six quarters.

France’s 10-year yields slid three basis points to 2.18 percent, down 10 basis points this week.

Hollande’s first budget was centered on tax increases aimed at raising 20 billion euros, including a 75 percent levy on incomes over 1 million euros. The premier aims to reduce the deficit to 3 percent of gross domestic product from 4.5 percent in 2012. The budget predicts growth of 0.8 percent.

German bonds have returned 1.1 percent in the past three months through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities rose 4.2 percent, while French debt earned 3.5 percent, the indexes show.

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