SPAIN’S BORROWING costs remain at critical levels as investors acted on doubts that measures agreed last month would effectively stem the country’s banking crisis.
Ahead of last night’s meeting of euro zone finance ministers, the yield on Spanish 10-year bonds rose nine basis points to top the 7 per cent level seen as unsustainable in the longer term.
Spanish 10-year government bond yields rose to 7.07 per cent, with the Italian equivalent also under pressure, rising 8.3 basis points to 6.11 per cent ahead of an Italian debt auction at the end of the week.
Yields on shorter-dated bonds rose sharply, with Spanish and Italian two-year yields up 20 and 30 basis points respectively, reflecting the elevated short-term risk. “It looks like the market is just going to keep going after Spain until it cracks,” one trader told Bloomberg.
Euro zone officials agreed last month that the euro zone’s bailout funds could be used to buy bonds in the secondary market – which could help Spain and Italy – and could also be used to directly recapitalise Spain’s ailing banks.
But the lack of detail on how the plans will be implemented, as well as opposition from Finland, has dampened initial market euphoria over the deal. Questions over the rescue funds’ capacity to undertake such steps and no signal the European Central Bank would take any further unconventional measures to support indebted countries have not helped.
ECB president Mario Draghi kept the door open yesterday to further interest rate cuts, saying the bank would make any decision on further action based on economic data.
Meanwhile, Irish bonds delivered the world’s best returns last week as investors bet a European agreement to save banks will reduce the nation’s debt burden and ease its ability to sell debt.
Investors made a return of 6.2 per cent on Irish debt repayable in more than 10 years and a gain of 5 per cent on bonds with a maturity of between seven and 10 years from June 28th to July 5th.
However, the euphoria may be premature. “We are toward the end of the rally,” said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland Group in London. “While getting the bank costs taken over by the rescue mechanism is a very positive factor, Irish bonds already reflect a great deal of good news. There has to be a more convincing reason to buy them given all the uncertainties surrounding the banking discussions.”
Yields on Ireland’s 5 per cent security due in October 2020 fell for a fifth week last week, the longest streak of declines in five months, after EU leaders paved the way for cash-strapped lenders to tap the region’s bailout fund directly. Ireland wants that policy to apply retrospectively to its banks after the government injected and pledged about €64 billion to save its financial system.
“The Irish Government is trying to milk the agreement to the hilt, but this is no game-changer,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London-based firm specialising in sovereign-credit risk.
“The concerns are with timing and implementation of these measures.” – (Bloomberg)