Spanish bonds spark fears for euro zone


SPANISH BOND yields jumped above 6 per cent yesterday, the highest level this year, reviving anxiety about the euro zone debt crisis and the health of the region’s fourth largest economy.

The rise in Spain’s cost of borrowing took place ahead of two bond auctions this week, at which Spain will seek to sell its debt to investors. Spain is scheduled to sell up to €3 billion of 12- and 18-month bills today and about €2.5 billion of notes due in October 2014 and January 2022 on Thursday.

Yields on Spain’s 10-year bonds initially climbed to 6.16 per cent, but fell back to 6.07 per cent by the end of the day. The volatility reflected uncertainty about whether the European Central Bank would intervene in the Spanish debt market, after Jaime Garcia-Legaz of Spain’s economy ministry called on the ECB to buy the nation’s debt to help stem turmoil in the financial market.

However, expectation of some announcement from the ECB yesterday proved unfounded.

Portuguese 10-year rates also rose for an 11th consecutive day, increasing 12 basis points to 12.68 per cent.

While there has been slight weakness in Irish short-term debt of late, benchmark nine-year Irish bond yields remained relatively stable yesterday at 6.8 per cent.

Spanish prime minister Mariano Rajoy’s announcement in early March that Spain would miss a deficit target of 4.4 per cent has triggered a slump in Spanish markets over the past month.

Mr Rajoy has raised taxes, cut spending and forced banks to increase provisions since he took power in December. The Spanish economy is expected to contract by 1.7 per cent this year, while unemployment is close to 23 per cent.

“Spain is finding itself in an austerity-versus-growth trap,” Ryan McGrath of Dolmen Securities said yesterday. “It needs to address its budget deficit to satisfy the markets, but the level of austerity measures has left markets wondering how it is going to generate growth. It is difficult to see in the short term what is going to turn things around for Spain.”

He expects Spanish yields will remain elevated ahead of Thursday’s auction.

Donal O’Mahony of Davy said although Spanish bond yields ended up on the day, they finished well off their highs of the morning, reflecting domestic demand for the bonds. He also said Spain is looking to auction a relatively small amount of debt on Thursday.

“It is also worth noting there are significant coupon payments, redemption flows coming into the Spanish market this month, which means a lot of cash needing reinvestment. In net terms it isn’t raising additional money this year.” – (Additional reporting: Bloomberg)