Spanish bond yields jump to decade high

By Miles Johnson in Madrid and David Oakley in London
Published: April 18 2011 11:49 | Last updated: April 18 2011 19:52


Fears over the eurozone’s debt problems intensified as the interest rate demanded by investors to hold Spanish bonds hit its highest in more than a decade.

Spanish benchmark 10-year bond yields, which have an inverse relationship with prices, rose to 5.55 per cent, the highest since September 2000. Spanish bond yields have jumped nearly half a percentage point since March 21.

Spain’s debt suffered after a poor bond auction raised concerns that Madrid could yet be sucked into the eurozone debt crisis. Hardening views that Greece was heading for a sovereign default hit sentiment.

Greek three-year bond yields reached fresh euro-era highs of 21.12 per cent as they saw their biggest daily rise since October. The euro fell against the main currencies after Greek press reports, denied by the government, that Athens had asked the International Monetary Fund and the European Union to restructure its debt.

General election results in Finland also unsettled the markets as the True Finns, a eurosceptic party that has vowed to block a rescue package for Portugal, made big gains.

However, worries about Spain following the lacklustre auction were the biggest concern for some strategists. The auction result raised questions over the opinion that Spain had pulled free from the problems that have hit Greece, Ireland and Portugal.

The yields investors demand to lend money to Spain for 12 months rose to 2.77 per cent, compared with 2.13 per cent in an equivalent sale in March. The yield on Spain’s 18-month bills rose to 3.36 per cent from 2.44 per cent.

The bid-to-cover ratio, a measure of investor demand relative to the debt available for sale, fell in both auctions compared with last month, dropping from 2.4 times to 1.6 times for the 12-month bills, and from 3.5 times to 2 times for the 18 month bills.

The rise in Spanish borrowing costs came after several months where the gap between Spain’s borrowing costs and those of Germany – seen by investors as the eurozone’s safest debt issuer – narrowed. This prompted some commentators to argue that the risk of Spain following Greece, Ireland and Portugal into an EU-led bail-out had receded.

Negative sentiment towards Spain was compounded by data showing that bad loans as a proportion of total credit at its banks rose to the highest level since 1995, according to data from the Bank of Spain.

Releases from the infrastructure ministry also showed that house prices had fallen 4.6 per cent on an annual basis, so they have now dropped in consecutive quarters for two and a half years.

The International Monetary Fund last week said Spain had “decoupled” from its peripheral eurozone peers. The Spanish government has adopted an increasingly confident tone about the success of measures it has taken to trim the budget deficit.

Some analysts, however, have said that increased stress in the eurozone’s periphery could prompt the capital markets to refocus on Spain’s stuttering economic growth and on its savings banks, which nurse balance sheets ravaged by a decade of property boom-inspired reckless lending.

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FT.com / Capital Markets - Spanish bond yields jump to decade high

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