Spanish bonds rise as Rajoy bank plan garners support

Spanish bonds rose for a third day as Prime Minister Mariano Rajoy’s call to boost efforts to protect the region’s banks gathered support among European leaders.

German securities fell, pushing up yields from record lows, as a report showed unemployment in Spain declined for a second month, damping demand for the safest fixed-income assets. The top European Union and French finance officials today pressed to allow direct euro-area aid for troubled banks after Rajoy called for a centralised system to recapitalise lenders. Spanish and Italian 10-year bonds jumped even as German government spokesman Steffen Seibert said jointly issued bonds in the euro area are unsuitable at this time.

 

“Spanish bond yields are stabilising a bit because people in the market are expecting some kind of policy response to the problem,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “The situation has worsened to the point that it’s reasonable for the market to expect policy makers to do something. But it’s hard to predict what that will be and when it will happen.”

The yield on 10-year Spanish bonds slid 15 basis points, or 0.15 percentage point, to 6.38 per cent at 4:24 pm London time. The 5.85 per cent security due in January 2022 climbed 1, or 10 euros per 1,000-euro ($1,250) face amount, to 96.2.

The last time Spanish 10-year bond yields fell for three consecutive days was in the period through March 9. Italian 10- year bond yields tumbled 21 basis points to 5.66 per cent, also declining for a third straight day.

Spanish government bonds lost 4.5 per cent in May, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. The nation’s borrowing costs surged as investors weighed the consequences of bailing out the Bankia group, Spain’s third-biggest lender, which has asked for 19 billion euros in government support.

The EU “needs to reinforce its common institutional architecture so that investors regain confidence in the single currency,” Rajoy said two days ago in Sitges, near Barcelona. “Spain will emerge from the storm through its own efforts and with the support of our European partners.”

EU Economy Commissioner Olli Rehn and French Finance Minister Pierre Moscovici said today that letting the euro area’s permanent rescue fund inject cash into banks instead of channeling the money through national governments would help stem the debt crisis in Europe. The step would move the 17- nation euro area toward a “banking union,” they said.

German Chancellor Angela Merkel will discuss proposals on closer banking coordination when she meets today in Berlin with European Commission President Jose Barroso, Commission spokeswoman Pia Ahrenkilde-Hansen said today. The Canadian government said that finance ministers and central bank governors from the Group of Seven countries will hold a conference call tomorrow to discuss the European debt crisis.

The extra yield that investors demand for holding 10-year Spanish debt instead of benchmark German bunds narrowed to 517 basis points from 536 basis points last week.

Spanish bonds stayed higher even after a report showed the European Central Bank refrained from buying bonds for a 12th straight week.

Spanish registered unemployment fell in May as the start of the country’s peak tourism season boosted hiring. The number of people claiming unemployment benefits fell by 30,113 from April, or 0.6 per cent, to 4.71 million, the Labor Ministry in Madrid said in a statement today.

Spain’s benchmark stock index, the IBEX 35, jumped 3.1 per cent, snapping a five-day decline, while the euro strengthened 0.5 per cent to $1.25.

Germany’s 10-year yield climbed four basis points to 1.22 per cent, after falling to 1.12 per cent at the end of last week, the lowest since Bloomberg began collecting the data in 1989. The two-year rate was little changed at 0.015 percent. The yield declined to as low as minus 0.012 per cent on June 1, the first day the rate turned negative, according to data compiled by Bloomberg.

The 10-year debt yields of Austria, Belgium, Finland, France and the Netherlands also dropped to all-time lows last week amid signs the debt crisis was deteriorating. The Netherlands sold 86- and 204-day bills today at an average rate of zero and 0.014 per cent, respectively.

Dutch and Irish bonds were the most volatile in euro-area markets, as measured by 10-year yields, the two-, 10-year yield spread and credit-default swaps.

Merkel said two days ago that “under no circumstances” would she agree to German-backed euro bonds. It’s up to the Spanish government to decide whether it wants to seek international aid to help recapitalise the country’s banks, her spokesman Seibert told reporters in Berlin today.

German bonds have returned 5 per cent this year, according to the Bloomberg/EFFAS indexes, as investors sought the safest assets.

The average yield on 1,294 government debt securities in Merrill Lynch’s Global Sovereign Broad Market Plus Index dropped to 1.47 per cent on June 1, the lowest rate since at least 1997, and down from 2.2 per cent a year earlier. The five-year average is 2.47 per cent. The index returned 30 per cent in the past five years and 3.1 per cent in 2012. The MSCI All-Country World Index of shares lost about 16 per cent since June 2007 and 1.4 per cent this year on a total return basis.

Portuguese bonds rose as Finance Minister Vitor Gaspar said today the nation is meeting goals of its bailout program. Portugal agreed in May 2011 on a European Union-led bailout that will provide as much as 78 billion euros in financial aid.

The fourth quarterly review of the aid plan was completed today, Gaspar told reporters in Lisbon. The government now forecasts gross domestic product will rise 0.2 per cent in 2013, he said.

The yield on 10-year Portuguese securities declined six basis points to 11.91 per cent. That’s still more than 5 percentage points above its five-year average of 6.43 per cent.

France sold 7.86 billion euros of bills maturing in 84, 175 and 357 days, including three-month debt at an average yield of 0.082 per cent, compared with 0.084 per cent at a sale of similar- maturity securities on May 29.