It News: Spanish Yields Retreat

Spanish Yields Retreat

By TOMMY STUBBINGTON and MICHELE MAATOUK
October 11, 2012

Bond yields on Spanish government debt eased back from earlier highs Thursday, while Spain's benchmark equity index pared losses and the rest of the region's stock markets edged higher, as investors grew hopeful that Standard & Poor's Corp.'s downgrade of Spain's credit rating would force the country's hand in seeking a bailout.
With Moody's Investors Service already assessing Spain's credit-worthiness at its lowest investment level, the country is a step closer to losing its membership in key bond indexes, which could in turn prompt selling of the nation's bonds, push yields even higher and force the government to seek a bailout.

Late in the European morning, Spain's 10-year government bond yield came off highs, largely unchanged at 5.78%, having touched 5.90% earlier in the session. Yields on Spanish debt are still considerably lower than peaks of more than 7% earlier this year.

Spain's IBEX-35 index lost 0.4% even as other European equity gauges rose.

The yield on Italy's 10-year government bond was down 0.02 percentage point at 5.07%, according to Tradeweb. Earlier, Italy sold the maximum targeted €3.75 billion euros ($4.83 billion) of its three-year benchmark bonds, although borrowing costs did tick higher.

Italy's FTSE MIB had reversed losses to trade up 0.5%.

Most investors with negative views on Spain have already placed their bets, according to Jane Foley, a currency analyst at Rabobank in London. "Investors are [therefore] less likely to display the lemming-like behavior required to force yields higher." she said.

S&P maintained its negative outlook on Spain, warning that its credit-worthiness could continue to deteriorate as it struggles to bring its budget deficit under control.

Fitch Ratings is known to be concerned about Spain's deepening recession, while Moody's Investors Service is set to decide by the end of the month whether it will lower Spain's debt rating to below investment grade.

Junk status may push Spanish bonds out of debt indexes that include only investment-grade securities, forcing investors who track these gauges to sell their holdings of Spanish bonds to match changes in the benchmarks. A wave of bond selling would crank up the country's debt-servicing costs.

"The prospect of seeing the two major agencies rating Spain below investment grade will lead to widespread selling over the coming month,," said Ciaran O'Hagan, an interest-rate strategist at Société Générale in London.

Meanwhile, the euro was resilient, fetching $1.2916 from $1.2876 late Wednesday in New York, clawing back the ground it had lost after the S&P downgrade was announced. The dollar was at ¥78.40 from ¥78.19.

Core European markets fared well, with the benchmark Stoxx 600 index up 0.5%. The U.K.'s FTSE 100 index was 0.6% higher, Germany's DAX was up 0.8% and France's CAC-40 was 0.7% firmer.

Greece's ASE Composite was down 0.6%, but off lows.

Retailers gave investors something to cheer about. Burberry BRBY.LN +10.67% soared after the British fashion house reported an increase in first-half sales, while Carrefour CA.FR +3.72% rose after posting a rise in sales of 2.1% in the third quarter from a year earlier.

In commodities, November Nymex crude oil futures were up $0.60 at $91.85 a barrel and the December Brent oil contract was up $0.76 at $113.94. Spot gold was up $5.70 at $1,769.70 a troy ounce.

The December Bund contract was up 31 ticks at 141.54.

—Nina Bains contributed to this article.