Spanish Bonds Slump With Italy’s as Greece Retakes Center Stage

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Spain’s government bonds fell, pushing 10-year yields up by the most in two weeks, as the prospect of Greece moving toward a default sparked a selloff in the euro region’s higher-yielding assets.

Italian 10-year securities dropped relative to similar-maturity German bunds for the first time in a week as Bild newspaper reported that German Chancellor Angela Merkel’s government was preparing for a Greek default. German bonds extended Thursday’s gains after European Union President Donald Tusk rebuked Greece for dragging its feet on a debt agreement.

“The spread widening is a Greek-related story,” said Lyn Graham-Taylor, a rates strategist at Rabobank International in London. “There seems to be a hardening of the position, particularly in Germany. We are getting closer and closer to the one-minute-to-midnight point where Greece has to make a decision.”

Spain’s 10-year bond yield rose 12 basis points, or 0.12 percentage point, to 2.25 percent as of 5 p.m London time, the biggest increase since June 2. The 1.6 percent security due in April 2025 fell 1.025, or 10.25 euros per 1,000-euro ($1,127) face amount, to 94.305. The yield dropped 11 basis points on Thursday, the steepest decline in a month.

The yield difference, or spread, between Spanish 10-year bonds and similar-maturity German bunds widened to as much as 146 basis points, the most since October.

Italy’s 10-year yield climbed seven basis points to 2.21 percent, after dropping 15 basis points over the previous two days. That left the premium that investors get for holding the securities instead of German debt up 12 basis points at 138 basis points, the first increase in a week.

Spread Outlook

That spread may tighten about 35 basis points if Greece agrees to a new package with its creditors, while a default could see it widen 40 basis points, Peter Chatwell, a rates strategist at Mizuho International Plc in London, wrote in a note on Friday.

Italy’s yield difference with Germany is little changed this week, demonstrating how contagion from from Greece has been contained since the European Central Bank started its various stimulus measures, culminating in an expanded quantitative easing program that began in March.

The spread between the lowest and the highest Italian 10-year yield was 15 basis points on Friday. That compared with 23 basis points on Thursday, which was partly driven by new supply as Italy auctioned 6 billion euros of debt.

Rising Tension

“Rising tensions in Greece should lead to some pressure on the periphery but the environment is more friendly compared to the past,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA. “Certainly the monetary-policy stance and the instruments that have been deployed by the ECB are a very important factor in keeping contagion risks relatively low.”

Greek 10-year yields rose 52 basis points to 11.76 percent, while two-year note yields added 137 basis points to 26.03 percent. The Athens Stock Exchange Index dropped 5.9 percent, the most since Jan. 28.

Yields on German 10-year bunds, the euro area’s benchmark sovereign securities, decreased five basis points to 0.83 percent after sliding 10 basis points on Thursday, the most in more than two years.