Date: Thursday 14 Jun 2012
Spanish bond yields predictably surged on Thursday in the wake of the decision by Moody's to cut Spain's sovereign debt rating by three notches to Baa3 from A3 previously.
More woe for the Iberian country could be in store, as Moody's said it plans to review its rating some time in the next three months to see whether further downgrades are warranted.
The decision to downgrade the country´s rating was based on three premises: 1. The recapitalisation of the banking sector will increase the country´s debt burden; 2. The government has very limited financial market access, as evidenced by the fact that its banks are the primary purchasers of its new bond issues; 3. The threat to its funding ability is much more serious “than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years.”
As for the review for a possible further downgrade, the agency said that the result will depend on, "the outcome of the ongoing external audits of the Spanish banking system, the conditionality and details of the EFSF/ESM loan agreement, and the specific execution strategy developed for the banking system's recapitalisation."
“Moody's will also consider any further initiatives at the euro area level. In addition, Spain's rating - as well as the ratings of other euro area countries - could be adversely affected if the risk of a Greek exit from the euro area were to rise further,” its analysts added.
Spanish 10-year yields topped 7% at one stage before easing back to around 6.92%.
The decision increased unease about the Italian bond auction but the event seemed to pass off without frightening the horses, although the Italian government was obliged to pay a higher cost to persuade investors to lend it money.
Italy issued a total of €4.5bn on Thursday morning in three, seven, and eight-year bonds. It matched its issuance target but had to pay higher yields than at the previous auction.
The eight-year bonds yielded a rate of 6.13% compared to 5.33% in the prior auction. The yield on the seven-year bond rose to 6.10% from the prior 5.21% and three-year bonds rose to 5.3% from 3.91%.
The Italian Treasury faced much the same fate on Wednesday when it issued €6.5bn euros in 12-month notes. It had to pay out a higher yield of 3.972% compared to 2.34% in May.
In the US, the yield on the benchmark 10-year Treasury rose from 1.60% to 1.63%.
In contrast to Italy, the US lobbed out $13bn of 30-year bonds at a record low yield of just 2.72%, as speculation mounted that the US Federal Reserve may introduce more measures to put a spring in the step of the US economy.
Back on this side of the Atlantic, the yield on the 10-year gilt eased to 1.73% from 1.75% the day before, although shorter dated yields mostly edged up a little.
In Germany, the yield on the 10-year bund was virtually unchanged.
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