Spanish Bonds Fall With Italy’s as Talks on Greece Rattle Market

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Spanish and Italian government bonds fell for the first time in three days as concern Greece’s negotiations with its creditors will fail to prevent it running out of money prompted a flight out of euro-area debt markets.

The region’s finance ministers met in Brussels Monday and welcomed the progress Greece has made while demanding more work before funds can be released, according to two officials who asked not to be named because the talks were private. On Tuesday, Greece must pay about 750 million euros ($836 million) to the International Monetary Fund. Italy is set to auction as much as 7 billion euros of debt due between 2018 and 2046 on May 13. Germany’s bonds declined.

“Tomorrow there’s the IMF payments, with some officials saying we will make the deadline and some others saying it will be tough,” said Mathias Van Der Jeugt, a fixed-income strategist at KBC Bank NV in Brussels. “For the periphery, some spread-widening is possible. There’s also some supply coming up for Italy and that’s also a factor that could weigh on BTPs,” he said, referring to Italian government bonds.

Spain’s 10-year bond yield rose eight basis points, or 0.08 percentage point, to 1.75 percent at 5 p.m. London time, after dropping 23 basis points over the previous two trading days. The 1.6 percent security due in April 2025 fell 0.75, or 7.50 euros per 1,000-euro face amount, to 98.66.

Similar-maturity Italian bond yields increased nine basis points to 1.77 percent.

Greek Turmoil

Greece’s financial turmoil has added weight to a selloff in euro-area bonds. Investors have turned against record-low yields amid speculation the European Central Bank may begin ending its quantitative-easing program sooner than intended or cause too great a squeeze on supply. The region’s government securities lost 1.4 percent in April, the first monthly drop since December 2013.

The average yield on euro-area sovereign bonds climbed to 81 basis points on May 6, almost double its record low of 0.43 percent, reached two months earlier.

The bonds tumbled even as the ECB finished its second month of asset purchases, elevating its weekly purchases as of May 8 by about 14 percent to 108.7 billion euros of sovereign debt, covered bonds and asset-backed securities, the most since its program started in March.

The yield on Germany’s 10-year bunds, the euro region’s benchmark sovereign securities, rose six basis points to 0.61 percent.

Liquidity Missing

Bunds are “still being driven by concerns about a lack of liquidity,” said Elwin de Groot, senior euro-area economist at Rabobank in Utrecht, Netherlands. “The situation in Greece could deteriorate quickly, and you could see a sharp fall back in German yields” as investors seek the safest assets, he said.

The 10-year bund yield will be at about 0.6 percent by year-end, de Groot said. That’s higher than the 0.5 percent median prediction of economists in a Bloomberg survey.

Fair value for the bund yield, including a premium to account for a potential Greek exit from the euro, is 0.84 percent, based on a model that takes into account bond yields and the ECB’s refinancing rate, Deutsche Bank AG analysts led by Dominic Konstam in New York wrote in a note dated May 8.

Spain’s government securities returned 0.9 percent this year through Friday, according to Bloomberg World Bond Indexes. Italy’s earned 2.5 percent, while Greece’s lost 0.3 percent, making them the worst-performing euro-region sovereign-debt market in the period.

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