Spain’s 10-year yield fell the most since August after leaders of the euro nations also scrapped the requirement that governments get preferred-creditor status on crisis loans to the country’s banks. German 10-year yields rose the most since November as optimism the financial turmoil will be contained sapped demand for the region’s safest assets. Spanish and Italian bonds still made quarterly losses.
“The key positive thing here is that we see some traction despite Germany digging its heels in on using bailout funds to support the market,” said Richard McGuire, a senior fixed- income strategist at Rabobank International in London. “The solution will be fiscal unity and that’s a step in that direction. There is an implementation risk, but for now risk-on is the order of the day and that will underpin demand for peripheral bonds.”
Spain’s 10-year yield fell 61 basis points, or 0.61 percentage point, to 6.33 percent at 4:41 p.m. London time. The 5.85 percent bond due in January 2022 gained 4.09, or 40.90 euros per 1,000-euro ($1,258) face amount, to 96.59. The yield dropped as much as 62 basis points, the most since Aug. 8, when the European Central Bank started buying the securities to cap borrowing costs.
Spanish two-year yields tumbled as much as 116 basis points to 4.26 percent, the lowest since June 11. Italy’s 10-year yield fell 39 basis points to 5.81 percent, and two-year rates slid 81 basis points to 3.50 percent.
‘All Options’
After almost 14 hours of talks ending in Brussels early today, chiefs of the euro countries also agreed that banks can also be recapitalized directly with European bailout funds rather than being channeled through governments.
“We agreed on short-term measures that should apply to Spain and Italy,” said Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro finance ministers. “We will keep all options open to do the interventions that need to be done to calm the situation. There is a whole array of possible interventions and measures.”
German Chancellor Angela Merkel said after the summit that she maintained her rejection of issuing joint bonds.
The euro strengthened 1.9 percent to $1.2681, and the Stoxx Europe 600 Index (SXXP) of shares climbed 2.8 percent.
Bunds Decline
Germany’s 10-year bund yield jumped seven basis points to 1.58 percent after climbing by 18 basis points, the most since Nov. 23. Europe’s benchmark yield has still declined 141 basis points over the past year and remained below its average of 3.53 percent for the past decade.
German bonds fell even after a government report showed retail sales in Europe’s biggest economy unexpectedly dropped for a second month in May.
Sales, adjusted for inflation and seasonal swings, slid 0.3 percent from April, when they declined 0.2 percent, the Federal Statistics Office said. Economists forecast a gain of 0.2 percent, a Bloomberg News survey showed.
Irish bonds rallied as Prime Minister Enda Kenny said the EU accord marked a seismic shift in policy that may ease the burden on the nation’s taxpayers. The yield on the country’s bond due in October 2020 fell 64 basis points to 6.47 percent.
Volatility on Irish government debt was the highest in developed markets today followed by Spain and Italy, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit-default swaps.
Quarterly Move
Spanish 10-year yields, which climbed to a euro-era record 7.29 percent on June 18, have still risen 98 basis points this quarter. They remain about two percentage points above the 4.30 percent average of the past decade. Similar-maturity Italian yields have increased 60 basis points since March 31.
“In the short term, risk assets especially those related to the financial sector will bounce,” David Roberts, joint head of fixed income at Kames Capital in Edinburgh, wrote in a note to clients. “Longer term, it remains to be seen if these baby steps are the first on the path to European politicians addressing the fundamental problems of a single currency and diverse fiscal policies.”
A Spanish Treasury report showed banks and foreign investors cut their holdings of Spanish debt in May. Banks’ holdings of government bonds fell to 28.7 percent of the total outstanding amount from 29.6 percent in April. The proportion of foreign ownership declined to 37.5 percent from 38.1 percent.
Spanish bonds have handed investors a loss of 7.4 percent this quarter as of yesterday, while Italian debt dropped 4.6 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds returned 2.1 percent.
From bloomberg
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