Yields Continue to Soar in Spain; France Debt Not Trading Like Triple-A

Although the ECB has been active in the bond market recently, buying the debt of Spain and Italy, yields continued to soar in Spain on Tuesday.

Yields more than doubled at an auction of 3- and 6-month T-bills in Spain on Tuesday. Reports indicate the Spanish treasury sold €2.01 billion of 3-month bills at an average yield of 5.110%. This was 2.2 times the rate of 2.292% rate seen at the at previous auction.

In addition, demand was tepid as the bid-to-cover ratio was reported at 2.9, which was below the 3.1 rate seen at previous auction.

Spain also sold €0.97 billion of 6-month bills at an average yield of 5.227%, which was well above the 3.302% rate seen at the previous auction. The bid-to-cover ratio for the 6-month auction was better at 4.9 versus the 2.6 from last month’s auction.

The yields on both the 3- and 6-month bills were more than 0.70% higher than the rate being asked on the secondary market on Monday afternoon.

The results of the auction were disconcerting to those who thought the change in government seen over the weekend would put a halt to the credit contagion taking place in Spain. The huge election victory by the conservative People's Party has apparently done nothing to ease rate pressures on Spain as Madrid was forced to pay the highest interest in 14 years at Tuesday’s auction.

Reuters reports Tuesday’s auction of T-Bills was seen as the first test of whether Prime Minister-elect Mariano Rajoy could reassure investors after a resounding victory on Sunday in the biggest election victory in 30 years. The answer was apparently a resounding "no".

Analysts suggest that the lack of details on budgetary reforms coming out of the new government is the primary reason for the jump in interest rates.

Finally, Spain may be ready to ask for help from the EU/ECB/IMF. Maria Dolores de Cospedal, who is the deputy leader of the People’s Party, which won last weekend's general election, said that the Spain needs a euro-region pact to “save and guarantee the solvency” of its debt amid surging bond yields. She told reporters that Spain cannot continue financing itself at 7%.

However, Spain is not the only Eurozone country seeing rates rise at the present time as France too has seen rates on its sovereign debt spike to Euro-era highs.

Although France’s debt remains triple-A rated at all three major rating agencies, French bonds are not trading like AAA rated paper. As such, it appears that the bond market is already in the process of downgrading French debt.

According to Bloomberg, two-year yields on French debt have climbed 55 basis points since Aug. 31 to 1.67%, while the rate on German notes of similar maturity have actually fallen 0.30% to 0.42%.

The yield spread between France and Germany continues to widen. Bloomberg reports that the extra yield demanded to lend to France for 10 years was 158 basis points more than the German rate on Tuesday. The gap is very close to the widest spread seen since 1990 and is up from just 28 basis points in April.

The yield on French 10-year bonds traded at 3.5% on Tuesday, which is in between the rates seen from triple-A rated Holland and Belgium. In addition, Bloomberg notes that French borrowing costs are more than afull percentage point above the AAA rated U.K.

 

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