Spanish Bonds Decline a Second Day on Rajoy Bailout Speculation

Spain’s government bonds fell for a second day as Prime Minister Mariano Rajoy’s reluctance to sanction a request for financial assistance damped demand for the nation’s securities.

Two-year rates rose for a second day after International Monetary Fund Chief Economist Olivier Blanchard suggested bond yields in Spain and Italy may reverse recent declines if the countries hold off from requesting bailouts. Rajoy meets French President Francois Hollande in Paris tomorrow. The Spanish premier has said he is considering a request for monetary aid, while damping speculation that it will come soon. The Netherlands sold five-year notes at a record-low auction yield.

“There is some risk off in the market,” said Alessandro Giansanti, a senior strategist at ING Groep NV in Amsterdam. “Investors are waiting to see whether Spain will ask for support and for the details of that.”

Benchmark 10-year Spanish yields rose 11 basis points, or 0.11 percentage point, to 5.82 percent at 5 p.m. London time. The 5.85 percent bond maturing in January 2022 fell 0.75 or 7.50 euros per 1,000-euro ($1,288) face amount to 100.175. Two-year yields climbed 10 basis points to 3.24 percent.

Spain’s bond maturing in January 2022 remains the nation’s benchmark security, a spokesman for the Economy Ministry said after Bloomberg data earlier showed the January 2024 security as the 10-year benchmark.

Draghi Pledge

Spanish 10-year yields have declined about two percentage points after reaching a euro-era record 7.75 percent on July 25, the day before European Central Bank President Mario Draghi pledged to do “whatever it takes” to safeguard Europe’s monetary union. Italian 10-year yields have dropped more than 150 basis points from 6.71 percent on July 25.

“The issue here is why the yields on Italian and Spanish bonds have come down,” IMF’s Blanchard said during a press conference in Tokyo today, adding that it may be because investors anticipated they would request aid from the European rescue mechanism. “If this is the case, we cannot be sure that the yields will remain low,” he said.

The yield on Italian 10-year securities added three basis point to 5.11 percent. It fell to 4.92 percent on Sept. 19, the lowest level since March 21. Ministers from the euro bloc yesterday declared the 500 billion-euro European Stability Mechanism operational.

‘Sensitive’ Issue

Spain’s economy minister Luis de Guindos said the nation will decide on the “sensitive” issue of a full bailout taking into account the impact for the whole euro area.

“The decision to apply for a program to ask the ECB to intervene is a very important and sensitive decision,” de Guindos said in Luxembourg following a meeting between European Union finance chiefs. “Given that the mere announcement of the intervention has had a favorable impact on capital markets, the government will take its decision taking into account what is best for the Spanish economy but also its surroundings.”

Rajoy last week pushed back expectations of a bailout, telling reporters no request was imminent. His deputy, Soraya Saenz de Santamaria, said the government needs to ensure a request for help from the ESM would be granted before it can call for financial assistance.

‘Test Resolve’

For Spain, “they will have to apply for some form of bond-buying program, the question is whether the markets test the resolve and push bond yields higher,” Charles Diebel, head of market strategy at Lloyds Banking Group Plc in London said in an interview with Guy Johnson on Bloomberg TV’s ‘The Pulse’. “Ultimately, you do need to see lower yields. I think there’s a good chance Spain will apply before Christmas,” Diebel said.

German bonds were little changed after Chancellor Angela Merkel used her first visit to Greece in five years to maintain pressure on Greek Prime Minister Antonis Samaras to meet austerity pledges, proclaiming her desire to keep the country in the euro.

“I want Greece to remain in the euro,” Merkel told reporters today in Athens. “A lot has been done, much remains to be done.”

Greece’s bond maturing in February 2023 rose for an eighth day, pushing the yield down two basis points to 18.33 percent. The rate earlier dropped to 18.10 percent, the lowest level since March 22. Greece sold 1.3 billion euros of six-month bills today at an average yield of 4.46 percent, down from 4.54 percent at a previous auction on Sept. 4.

German Sale

Germany’s 10-year bund yield was little changed at 1.47 percent. The nation plans to sell 4 billion euros of five-year notes and 1.5 billion euros of inflation-linked bonds maturing in 2023 tomorrow.

The Dutch State Treasury sold 2.3 billion euros of notes maturing in January 2018 at an average yield of 0.861 percent, down from 1.305 percent at the previous auction of the securities on July 3. The rate was the lowest recorded at a sale of five-year securities since Bloomberg began compiling auction history data in 2003.

Volatility on Ireland’s government bonds was the highest in developed markets today, followed by the U.S. and Norway, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit default swaps.

German bonds returned 3.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities advanced 2 percent, while Italian debt earned 16 percent.

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