May 29, 2012 / 11:54 AM / in 7 years

Spain under pressure; Bunds hit highs on bank plan

LONDON (Reuters) - German government bond yields hit fresh lows and Spanish yields held near peaks on Tuesday, pressured by indications that Madrid will recapitalize nationalized lender Bankia by issuing new bonds.

Euro zone government bond markets had paused for breath early in the session but the realization that Spain’s debt issuance could rise at a time when international investors are deserting the country prompted a fresh bout of risk aversion.

The scale of Spain’s banking problem has been highlighted by Bankia, which asked for a 19-billion-euro bailout on Friday. It reposted 2011 results late on Monday to reflect a 3.3 billion euro loss rather than a modest profit.

A government source said that as well as issuing debt to recapitalize Bankia, Spain would likely adopt on Friday a new mechanism to back its regions’ debt, commitments analysts saw as unsustainable.

“The point about Spain is it’s going to need some external support of some form,” said David Owen, chief European financial economist at Jefferies.

“Whether that implies the European Central Bank buys bonds (in the secondary market) or moves lock, stock and barrel to quantitative easing over the next three months, certainly the situation at the moment is not sustainable.”

Short-dated Spanish government bonds yields were almost 10 basis points higher. While 10-year yields were 2 basis points lower at 6.47 percent. that is two full percentage points higher than at the beginning of February and closing in on record highs of 6.8 percent.

With the true scale of losses from bad property loans still not known, Spain has said independent auditors are to assess the health of its banks, with markets likely to stay edgy until the scope of any writedowns, or future writedowns, is known.

“Markets will fluctuate day to day but I don’t think you’ll see any major buying of Spanish assets until the auditors’ report is out,” said Gary Jenkins, director at Swordfish Research.

Higher yields over a long period will raise the country’s cost of financing, potentially limiting access to debt markets as Ireland and Portugal found when yields on their bonds topped 7 percent.


Spanish derivatives exchange MEFF launched a 10-year Spanish government bond future on Tuesday. The instrument is intended to offer a more efficient way of hedging exposure to Spanish government bonds.

The September contract was 3 ticks higher at 95.27, after giving back much of its early gains.

“We expect there to be good domestic support for the Bono future,” Credit Agricole said in a note, adding that the introduction of the contracts could spur some demand for Spain’s January 2022 bond, which was the cheapest to deliver when the individual contracts expired.

Safe-haven 10-year German Bund yields hit a fresh low of 1.346 percent and with Greek elections looming in just over two weeks and an Irish referendum on the EU fiscal treaty on Thursday, few in the market saw any notable sell-off soon.

Greece’s conservatives have an opinion poll lead that would allow the formation of a government committed to keeping the country in the euro zone but it remains a tight race. Ireland is expected to approve the treaty despite anger at government austerity measures.

June Bund futures set new highs of 144.58 and were last up 9 ticks at 144.46.

“There’s enough out there to keep Bunds well supported,” a trader said.

Italy found decent demand at an 8.5 billion euro bill sale, although borrowing costs jumped. The sale came ahead of a 6.25 billion euro sale of longer-dated bonds on Wednesday.

“While we expect the Italian auctions to go well, pre-auction cheapening should leave its toll on BTPs, with spill-over effects likely to ... (affect) Spanish government bonds,” Commerzbank strategist David Schnautz said.

Reporting by Kirsten Donovan; Editing by Catherine Evans, John Stonestreet

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