Spanish debt has slumped, pushing the 10-year yield to a euro-era record of 7.14% yesterday.
The bonds are the worst performers among 26 developed markets since June 9, when economy minister Luis de Guindos said he would request as much as €100bn of emergency loans to shore up a Spanish banking system hobbled by bad assets.
“Yields are at levels at which Spain can’t really afford to finance itself for more than a few months,” said Craig Veysey, head of fixed income at Principal Investment Management in London. “The banking bailout doesn’t really help Spain’s credibility in the market and the probability is rising that it will be asking for a bailout for the sovereign.”
Spain’s prime minister Mariano Rajoy called on Europe’s policymakers last week to do more to support Spanish bonds after the bank rescue failed to halt yields from climbing to levels at which Greece, Portugal and Ireland needed to seek help. His government is battling to reduce the nation’s debt load as the recession in the eurozone’s fourth-largest economy deepens, leaving the unemployment rate at more than 24%.
Adding to investor concern is Greece, where analysts at Bank of America Merrill Lynch say the country may run out of money next month.
Spain’s 10-year bond rate has surged more than 2 percentage points from this year’s Mar 1 low. The yield climbed 26 basis points yesterday. The yield difference to similar-maturity benchmark German bunds widened to 572 basis points, the most since the start of the euro.
The nation’s bonds also risk incurring higher trading costs at LCH Clearnet as their performance relative to Europe’s AAA rated benchmark deteriorates. LCH, Europe’s biggest clearing house, increased the cost of trading Irish and Portuguese bonds by 15% when yield spreads for those securities rose above 450 basis points.
A three-year, fully-funded programme for Spain would probably cost about €300bn in addition to the €100bn bank bailout, said Nick Eisinger, of Fidelity Investments in London.
“The market is very sceptical because the bank deal doesn’t really make any difference to the tricky and challenging position of the Spanish economy,” Mr Eisinger said. “There’s a pretty strong likelihood that the Spanish sovereign will need some kind of a funding programme in the next six to nine months.”
The bank aid will increase Spain’s debt to 90% of GDP, Moody’s said, as it dropped Spain’s rating three levels to Baa3, one step above junk.