Spanish Bonds Slide on Cyprus Deal Concern as German Bunds Rise

Spain’s government bonds fell, with 10-year yields rising the most in almost four weeks, as a bailout agreement for Cyprus failed to convince investors that fallout from the nation’s banking crisis would be contained.

Italy’s securities dropped for the first time in four days as Reuters reported Dutch Finance Minister Jeroen Dijsselbloem as saying the Cypriot rescue plan, which included losses for some bondholders and depositors, may become a template for euro-area bank bailouts. Cypriot lawmaker Nicholas Papadopoulos, chairman of the parliamentary finance committee, said the nation must explore the benefits of exiting the euro area. German bonds advanced as investors sought the region’s safest securities.

“It’s a very blunt suggestion that uninsured depositors are likely to contribute to banking bail-ins in future,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “Spanish and Italian bonds are falling and bunds are rising because it suggests that Cyprus is not in fact a unique case.”

Spain’s 10-year yield climbed 10 basis points to 4.96 percent at 5 p.m. London time, the biggest increase on a closing basis since Feb. 26. The 5.4 percent bond maturing in January 2023 declined 0.82, or 8.20 euros per 1,000-euro ($1,286) face amount, to 103.35.

Italian 10-year yields climbed 10 basis points, or 0.1 percentage point, to 4.61 percent.

Disorderly Default

Cyprus avoided a disorderly default by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros of aid. President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc of creditors in night-time negotiations.

The accord spares bank accounts below the insured limit of 100,000 euros, while imposing losses that two European Union officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the island’s largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl, the second largest.

“We wish to stay in the euro zone but leaving the euro zone now is a valid point that has to be explored because we are going to enter into a very deep recession, high unemployment with no prospect of growth and we need to examine if there are other ways to solve these hurdles,” Papadopoulos said in a Bloomberg Television interview with Ryan Chilcote in Nicosia.

‘Similar Fate’

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, wrote in a Twitter post that “Cyprus haircuts prove just 1 thing: without growth, highly indebted EU countries will eventually suffer a similar fate.”

German, Dutch and Austrian bonds rallied as investors sought the debt of so-called core nations. Ten-year bund yield dropped five basis points to 1.33 percent, the lowest level since Jan. 2.

German bunds have returned 0.5 percent this month through March 22, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds earned 1.3 percent and Spain’s gained 1.1 percent.

Italy sold 2.8 billion euros of zero-coupon bonds maturing in December 2014 at an average yield of 1.746 percent, the highest since Dec. 27. The country also auctioned 1 billion euros of inflation-linked debt.

Belgium sold a combined 3.49 billion euros of bonds due in 2018, 2023 and 2032.

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