BS: Spanish Bonds Decline a Second Day on Rajoy Bailout Speculation
Spain’s government bonds declined for a second day as Prime Minister Mariano Rajoy’s reluctance to sanction a request for financial assistance damped demand for the nation’s securities.
Two-year rates rose for a second day after International Monetary Fund Chief Economist Olivier Blanchard suggested bond yields in Spain and Italy may reverse recent declines if the countries hold off from requesting bailouts. Rajoy meets French President Francois Hollande in Paris tomorrow. The Spanish premier has said he is considering a request for monetary aid, while damping speculation that it will come soon. The Netherlands sold five-year notes at a record-low auction yield.
“There is some risk off in the market,” said Alessandro Giansanti, a senior strategist at ING Groep NV in Amsterdam. “Investors are waiting to see whether Spain will ask for support and for the details of that.”
Benchmark 10-year Spanish yields rose five basis points, or 0.05 percentage point, to 5.77 percent at 1:36 p.m. London time. The 5.85 percent bond maturing in January 2022 fell 0.365 or 3.65 euros per 1,000-euro ($1,296) face amount to 100.56. Two- year yields added nine basis points to 3.23 percent.
Spain’s bond maturing in January 2022 remains the nation’s benchmark security, a spokesman for the Economy Ministry said after Bloomberg data earlier showed the January 2024 security as the 10-year benchmark.
Draghi Pledge
Spanish 10-year yields have declined about two percentage points after reaching a euro-era record 7.75 percent on July 25, the day before European Central Bank President Mario Draghi pledged to do “whatever it takes” to safeguard Europe’s monetary union. Italian 10-year yields have dropped more than 150 basis points from 6.71 percent on July 25.
“The issue here is why the yields on Italian and Spanish bonds have come down,” IMF’s Blanchard said during a press conference in Tokyo today, adding that it may be because investors anticipated they would request aid from the European rescue mechanism. “If this is the case, we cannot be sure that the yields will remain low,” he said.
The yield on Italian 10-year securities was little changed at 5.08 percent. It fell to 4.92 percent on Sept. 19, the lowest level since March 21.
Ministers from the euro bloc yesterday declared the 500 billion-euro European Stability Mechanism operational.
Bailout Expectations
Rajoy last week pushed back expectations of a bailout, telling reporters no request was imminent. His deputy, Soraya Saenz de Santamaria, said the government needs to ensure a request for help from the ESM would be granted before it can call for financial assistance.
For Spain, “they will have to apply for some form of bond- buying program, the question is whether the markets test the resolve and push bond yields higher,” Charles Diebel, head of market strategy at Lloyds Banking Group Plc in London said in an interview with Guy Johnson on Bloomberg TV’s ‘The Pulse’. “Ultimately, you do need to see lower yields. I think there’s a good chance Spain will apply before Christmas,” Diebel said.
German bonds slipped as Chancellor Angela Merkel arrived in Athens for her first visit to Greece since the financial crisis began in 2009. The 10-year bund yield added two basis points to 1.50 percent.
The Dutch State Treasury sold 2.3 billion euros of notes maturing in January 2018 at an average yield of 0.861 percent, down from 1.305 percent at the previous auction of the securities on July 3. The rate was the lowest recorded at a sale of five-year securities since Bloomberg began compiling auction history data in 2003.
Volatility on Finnish government bonds was the highest in developed markets today, followed by Spain and Norway, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit default swaps.
German bonds returned 3.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities advanced 2 percent, while Italian debt earned 16 percent.
To contact the reporters on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
