Yields on Spanish bonds climb above 6%

A JUMP in the cost of Italian and Spanish debt was the main feature of the sovereign debt market yesterday, stoking concerns that the euro zone debt crisis shows no signs of abating and may be spreading to Spain, despite political change in Italy over the weekend.

Equity markets rose strongly on opening yesterday as markets responded to news that former European commissioner Mario Monti had taken over the mantle in Rome, while upbeat economic data from Japan also lifted investor sentiment.

However, a scheduled auction of Italian bonds mid-morning meant the rally was short-lived, with markets retreating for the rest of the session.

Italy’s treasury auctioned €3 billion of September 2016 notes at a yield of 6.29 per cent, up from 5.32 per cent at the previous auction and the highest since June 1997. The yield on 10-year Italian bonds rose 25 basis points, or 0.25 percentage points, to 6.70 per cent.

Italy’s borrowing costs soared past 7 per cent last week, before falling back.

However, most concern was directed yesterday at Spain’s spiralling cost of borrowing. Yields on 10-year Spanish bonds climbed 27 basis points, or 0.27 percentage points, to 6.12 per cent, surpassing 6 per cent for the first time since the European Central Bank started buying the country’s bonds on August 8th.

The ECB began its bond-buying programme in August to prevent the fiscal crisis from spreading across the region.

However, yesterday German ECB council member Jens Weidmann said that the “co-option of monetary policy for fiscal needs must come to an end”, calling on governments to “decisively tackle their own problems”.

His comments echoed a statement by the central bank in its monthly report last week, which noted that all unconventional measures are “temporary in nature”.

This strategy appears to be borne out by data from the ECB yesterday, which shows that the Frankfurt-based bank bought fewer bonds last week.

The ECB settled €4.48 billion of bond purchases last week, down from €9.5 billion the previous week.

The central bank will take seven-day term deposits today to absorb the €187 billion of liquidity created since its bond programme started six months ago, a practice it employs to ensure the purchases do not fuel inflation.

There is a political backdrop to the rising cost of Spanish sovereign debt, as Spanish voters prepare for an election this week. The new government will be obliged to slash the deficit by about a third and finance bond redemptions of about €50 billion next year.

As well as tensions on the bond market, equity markets also closed lower yesterday. The Stoxx Europe 600 Index dropped 1 per cent, with all the main European bourses closing lower.

London’s FTSE ended down 0.5 per cent at 5,519, the Paris CAC shed 1.3 per cent to 3,109, and in Frankfurt the DAX dropped 1.2 per cent to 5,985.

Spanish equities also fell, driven down by banking shares. BBVA, Spain’s second-biggest bank, dropped 3.2 per cent to €5.97, Banco Santander, the country’s largest bank, closed down 2.7 per cent to €5.65, while Bankinter SA slipped 2.3 per cent to €4.15.

Market sentiment was not helped by the publication of official figures from Eurostat which showed that euro zone industrial production was down 2 per cent in September. The OECD also struck a downbeat note, as it reported that all economies declined in September.

The euro declined 1.1 per cent against the dollar to $1.3607, while it depreciated 1.2 per cent to 104.86 yen after rising 0.7 per cent over the previous two sessions.

Additional Reporting: Bloomberg