Spain bonds drop amid bailout concern as bunds fall on Moody’s

July 24 (Bloomberg) -- Spanish bonds fell, pushing five- and 10-year yields to euro-era records, as the nation’s borrowing costs rose at an auction amid concern its banks’ and regions’ debts will force it to seek a sovereign bailout.

Italy’s 10-year bonds declined for a third day after services and manufacturing in the euro region shrank in July. Germany’s bunds sank, pushing up yields from near all-time lows, after Moody’s Investors Service cut the outlook on the nation’s top rating citing concern it will have to support weaker euro-region members. Government debt from the Netherlands fell as its outlook was also lowered by Moody’s, along with Luxembourg.

“It’s a desperate situation” for Spain, Robin Marshall, who helps oversee the equivalent of $19 billion as director of fixed income at Smith & Williamson Investment Management in London, said in an interview on Bloomberg Television’s “The Pulse” with Caroline Hyde. “Markets are slowly closing to them so I don’t think there’s much doubt they’ll need an international package at some point soon.”

Spain’s 10-year yield rose eight basis points, or 0.08 percentage point, to 7.58 percent at 3:22 p.m. in London after climbing to 7.625 percent, the highest since November 1996. The 5.85 percent bond due in January 2022 dropped 0.505 or 5.05 euros per 1,000-euro ($1,209) face amount, to 88.51. The yield jumped 23 basis points yesterday.

The Spanish five-year rate increased as much as 16 basis points to 7.57 percent.

Considering Options

Spain sold 3.05 billion euros of bills today, including 84- day securities at a yield of 2.434 percent, compared with a rate of 2.362 percent at an auction on June 26.

The nation’s government hasn’t ruled out leaving the euro and is considering options including an international bailout or default, El Confidencial reported, citing unnamed sources close to Prime Minister Mariano Rajoy. Spain’s Economy Minister Luis de Guindos will visit Berlin today for crisis talks with German counterpart Wolfgang Schaeuble.

The German 10-year yield rose eight basis points to 1.25 percent, after matching its June 1 record low of 1.127 percent yesterday. The Dutch 10-year yield climbed 12 basis points to 1.76 percent.

“The closer we get to a larger bailout for Spain, the more it will start to weigh on bunds,” said Allan von Mehren, a fixed-income strategist at Danske Bank A/S in Copenhagen. “The situation for Spain is unsustainable and it’s just a matter of time before we see some kind of intervention.”

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