Europe Update: Yields Rise at French and Spanish Auctions

The European debt mess continues unabated today as both France and Spain struggled to raise money in the bond market on Friday.

Reuters reports that Spain paid the highest yields on bonds since 1997 at a sale of 10-year bonds, with yields 1.5 points above the average paid at similar bond offerings this year.

France’s auction fared a bit better, but again the Eurozone’s second largest economy was forced to pay significantly higher yields in order to roll over €7 billion. Fears that France will soon become part of the contagion that has seen the sovereign debt crisis reach new levels this week.

Here are the results of Friday’s bond auctions:

France: France sold €6.98 billion worth of medium-term notes today, which was at the high end of its projected range. The €950M in notes maturing in September 2013 had an average yield of 1.85%, up from 1.31% last month. The €1.07B in notes maturing July 2015 had an average yield of 2.44%, up from 1.96%. The €3.3B in notes maturing in July 2016 had an average yield of 2.82%, up from 2.31%.

Spain: Spain sold €3.563B of new 10-year debt at 6.975%,which was the highest yield since 1997, and up from 5.433% at the last 10-year auction on October 20. The bid-to-cover was 1.54 versus the 1.76 seen at last month's auction. The offering range for today's sale was €3B-€4B.

Many believe the only way to put an end to the ever-increasing yields being demanded by bond investors in Europe is for the ECB to implement a quantitative easing program similar to those put in place in the U.K. and the United States.

Up until just recently, the Germans have opposed such an idea. However, comments made by Chancellor Angela Merkel Friday may represent a softening of that stance.

Reuters noted Friday that according to traders, the ECB was back in the bond market buying Italian bonds after the Spanish bond auction Friay. One trader told Reuters that central bank purchases have been concentrated on 10-year Italian maturities. The article noted that the spread over German paper has narrowed to 537 bp in recent trading from 550 bp earlier in the session.

With yields in the Eurozone being the focal point of the stock market, it is important to continue to monitor this situation closely.

 

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