Spain Bonds Drop After Retail Sales Slump

Spanish and Italian government bonds fell after a report showed Spain’s retail sales slumped in September, underscoring the nation’s deepening recession as its government resists seeking a sovereign bailout.

The extra yield investors demand to hold Spain’s 10-year bonds instead of similar-maturity German bunds widened for a third day as Prime Minister Mariano Rajoy said he’ll request a bailout when he judges it’s in the nation’s interests. Italian two-year notes declined for a sixth day, the longest run since May, after former premier Silvio Berlusconi’s party threatened to topple the government by withdrawing support. Bunds rose as investors sought the region’s safest assets.

“Investors are becoming nervous that Spain won’t ask for aid and then they also see the negative macro news coming from the nation,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “There’s a lot of political risk surrounding Spain and Italy and those risks are increasing for Italy so we see some volatility in the bonds.”

Spain’s 10-year yield climbed six basis points, or 0.06 percentage point, to 5.66 percent at 4:50 p.m. London time, extending its increase from this month’s low of 5.26 percent on Oct. 19. The 5.85 percent bond due in January 2022 fell 0.455, or 4.55 euros per 1,000-euro ($1,290) face amount, to 101.34.

The yield spread over German bunds expanded as much as 16 basis points to 421 basis points, the widest since Oct. 17.

Sales Decline

Retail sales in Spain dropped 11 percent from a year earlier, the National Statistics Institute said. Figures on public finances, consumer prices and gross domestic product tomorrow are likely to confirm a deteriorating economy and debt profile, according to Bloomberg News surveys.

Spain has yet to request a bailout that would trigger European Central Bank purchases of its debt. The plan, unveiled by ECB President Mario Draghi last month, is designed to help contain the region’s debt crisis.

“As soon as I think that it’s good for the general interests of Spain to ask for it I will ask for it,” Rajoy said today at joint press conference with Italian Prime Minister Mario Monti in Madrid. “While I don’t think that, I won’t.”

Bank of Spain deputy governor Fernando Restoy today set out plans for establishing a so-called bad bank to buy impaired property assets from the lenders it is bailing out. The nation is creating the bad bank as part of its 100 billion-euro European bank bailout.

Italian Bonds

Italian 10-year yields climbed to the highest in two weeks after Berlusconi, whose People of Liberty Party is the biggest in the national parliament, said on Oct. 27 the government’s economic policies were deepening the recession.

National elections are due by May though there is a risk that Berlusconi’s actions will trigger an earlier vote. Monti told reporters in Madrid his government can’t be threatened by parliamentary backers who consider withdrawing their support.

“The specter of political risk is beginning to rear its head in Italy,” Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London, wrote in a note to clients. Berlusconi “has begun making headlines again. The developments over the weekend capped off a week which saw peripheral debt trade weaker,” she said.

Italian 10-year yield rose 11 basis points to 5.02 percent, the highest level since Oct. 12.

Italy sold 8 billion euros of 181-day bills at an average yield of 1.347 percent, down from 1.503 percent at the previous auction on Sept. 26.

‘Disappointing’ Data

German 10-year bunds advanced for a second day as speculation the regional economy is deteriorating underpinned demand for the securities.

“The economic data so far has been rather disappointing, and in that sense the ECB will want to leave the door open to another rate cut,” said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht. “Given that Spain still hasn’t applied for official aid, we’re still in a situation where bunds should perform fairly strongly.”

Germany’s 10-year yield dropped eight basis points to 1.46 percent after falling to 1.45 percent, the lowest since Oct. 15.

Germany auctioned 1.92 billion euros of 12-month bills at an average yield of minus 0.0095 percent. The nation last sold 12-month securities on Sept. 24 at yield of minus 0.018 percent.

Belgian Sale

Belgium sold 10-year bonds at 2.418 percent, down from 2.609 percent last month and the least since the introduction of the euro in 1999. The nation also auctioned debt maturing in 2017, 2032 and 2035.

The Belgian auction “was well absorbed,” Annalisa Piazza, a strategist at Newedge Group in London, wrote in an e-mail to clients. “Demand for non-German core debt is still solid.”

The yield on Belgian 10-year bond fell three basis points to 2.43 percent.

Volatility on Germany bonds was the highest among euro-area markets today, followed by those of the Netherlands and Finland, according to measures of 10-year debt, the spread between two-and 10-year securities, and credit default swaps.

German bonds returned 2.8 percent this year through Oct. 26, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities also gained 2.8 percent, while Italy’s rose 17 percent.

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