Bonds: Spain feeling Greek pain

Date: Monday 14 May 2012

These were the yields and movements on some of the most watched 10 year bonds by the close in Europe:

Spain: 6.23% (+22bp)
Italy: 5.70% (+19bp)
France: 2.83% (+0.3bp)
Germany: 1.46% (-6bp)
UK: 1.88% (-9bp)
US: 1.78% (-6bp)

Things are looking very bad indeed.

The ongoing political paralysis in Greece is causing severe weakness for the under-pressure debt of Italy and Spain - both of which sold bonds today.

Spain moved €2.9bn in 12 month bonds at an average yield of 2.985%, up from the 2.623% seen at a similar auction in April.

Italy sold €5.25bn in bonds, including some benchmark 10 securities at a yield of 5.75%. The bid to cover ratio was 2.27 - this was the first Italian 10 year bond sale for 7 months.

On the surface, the fact both countries managed to complete sales was good news. But Spain, in particular, is fighting for its financial independence.

The country is demanding a huge, €30bn increase in the provisions its banks must make against bad debts while also offering to pump in €15bn of government cash into distressed lenders. Whether it can afford to do so is a moot point.

The suspicion remains that left-wing politicians in Greece are prepared to call Europe’s bluff - if they do gain power in a second round of elections they will renege on the terms of the current bailout packages, worth €240bn - calculating that the EU hierarchy would be too frightened to let the Eurozone break apart. On the basis of today’s yields, they may well be right.

BS

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