Spanish Sovereign

Spain’s government bond yields spiralled north of 7% on Friday. EU agreement on a bail-out for the troubled sovereign’s banking system has failed to convince investors that it is enough to set Spain on the path to recovery.

Spanish bond yields have leapt up on Thursday after a difficult auction of short to medium term debt. The auction allowed Europe’s peripheral sovereign debt crisis to raise its ugly head in a week where other sovereign credits have been issuing at low and even negative yields.

The European Financial Stability Facility (EFSF)mandated three banks to run a much anticipated five year benchmark, following a request for proposals a week ago for €3bn of funding. The mandate comes on a day when Spanish 10 year yields sat north of 7% and Eurozone finance ministers met in Brussels to discuss the latest developments in the sovereign debt crisis.

Europe’s €100bn scheme for a bail-out of Spanish banks buoyed market sentiment for Monday’s open, but senior bankers are already questioning whether the detail of the scheme will reveal a flawed plan to stave off a full Spanish sovereign rescue package.

Spanish government bonds had widened 10-15bp across the curve on Friday afternoon, amid speculation that the sovereign will seek assistance for its banking sector from the European Union at the weekend. Meanwhile the European Investment Bank was the only issuer to provide primary supply with a long-dated tap.

Standard & Poor’s placed 15 eurozone sovereigns on CreditWatch with negative implications on Monday. Six of those countries, including Austria, Germany and the Netherlands, are rated triple-A.

The positive tone to the European government bond market this week could be short lived if Europe’s leaders fail to tackle the continent’s fiscal problems at next week’s summit, warned bankers.

Belgium managed to auction €2bn of new paper on Monday morning despite a credit rating downgrade on Friday night. Some of Europe’s worst hit sovereign markets saw yields and spreads against Germany tighten on hopes that the IMF was building a rescue package for Italy and Spain.

Belgium managed to auction €2bn of new paper on Monday morning despite a downgrade on Friday night. Some of Europe’s worst hit sovereign markets saw yields and spreads against Germany tighten on hopes that the IMF was building a rescue package for Italy and Spain.

Spanish 10 year yields continued to rise on Tuesday morning as it prepared for auction on Thursday. Yields for the country hovered between 6.23% and 6.25%. Meanwhile, Italian yields rose back above 7%.

Italy successfully navigated its planned five year bond auction on Monday morning but any relief on the part of investors is tempered by scepticism over the quality of the sale. French yields rallied but that sentiment may be short-lived, said bankers, as investors targeted Spanish Bonos.

Some form of resolution to the Greek debt crisis could be imminent in a bid to stop contagion as Italian and Spanish govvies cheapened again on Monday morning and EU finance ministers met in Brussels.