Spanish government securities led declines among the euro-region’s so-called peripheral countries as renewed signs of political instability in the currency bloc damped demand for the nation’s assets.
Spain’s 10-year yields climbed to the highest level in seven weeks as Premier Mariano Rajoy was accused of accepting illegal cash payments and strategists from Commerzbank AG recommended investors cut holdings of the country’s debt. Italian and Portuguese securities dropped as analysts at Morgan Stanley and Deutsche Bank AG said this year’s rally in periphery bonds may falter. German bunds advanced.
“The market is realizing that there are still substantial risks out there, especially on the political front,” said Michael Leister, a fixed-income strategist at Commerzbank in London. “The dynamics in Spain are devastating because they have the potential to cause a lot of damage. If in the worst case we would get a new election in Spain, this would be a real shocker for the market.”
Spain’s 10-year yield jumped 23 basis points, or 0.23 percentage point, to 5.44 percent at 4:30 p.m. London time, the highest level since Dec. 17. The 5.4 percent bond maturing in January 2023 fell 1.78, or 17.80 euros per 1,000-euro ($1,354) face amount, to 99.685.
Yields on similar-maturity Italian debt increased 15 basis points to 4.48 percent after reaching 4.89 percent, the most since Dec. 31. Portugal’s 10-year yields climbed 26 basis points to 6.44 percent.
Rajoy’s assurance that the allegations of illegal payments are false failed to contain criticism, with the opposition demanding he step down to restore faith in the political class.
“Rajoy should resign to make way for another prime minister who can re-establish the strength, credibility and stability that Spain needs,” opposition leader Alfredo Perez Rubalcaba said during a televised press conference yesterday.
Former Italian Prime Minister Silvio Berlusconi is gaining in public opinion polls before parliamentary elections on Feb. 24-25 even as he stands trial on charges he paid a minor for sex and appeals a four-year prison sentence for tax fraud.
The extra yield investors demand to hold Spanish 10-year bonds instead of German bunds widened 28 basis points to 381 basis points after reaching 383 basis points, the most since Jan. 2. The Italian spread over Germany expanded 19 basis points to 285 basis points.
The Spanish spread may increase toward 400 basis points in coming weeks, Commerzbank’s Leister said.
Investors should adopt a more cautious stance toward European bonds, according to a Feb. 1 research note from Morgan Stanley strategists including global head of interest-rate strategy Laurence Mutkin in London.
“The market may start to focus on the immediate political risks in Europe,” Francis Yared, head of European rates strategy at Deutsche Bank in London, wrote in a separate note.
Germany’s 10-year yield dropped five basis points to 1.62 percent after earlier rising as much as five basis points. The yield climbed to 1.73 percent on Jan. 30, the highest level since Sept. 17.
Bunds fell in earlier trading after a euro-area report showed investor confidence increased this month, damping demand for the region’s safest assets.
The Sentix research institute index measuring sentiment in the euro-area economy advanced to minus 3.9 from minus 7 in January. Economists had forecast a gain to minus 1.7, according to a Bloomberg News survey.
Germany’s government bonds have handed investors a loss of 1.7 percent this year through Feb. 1, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt gained 1.9 percent and Italian securities returned 1.4 percent.
The Netherlands sold 2.76 billion euros of three-month bills today at an average yield of zero percent and 1 billion euros of six-month securities at 0.02 percent. France sold 7.38 billion euros of bills.