Eurozone bond market tension rises

9 July 2012
Spanish and Italian interest rates climbed Monday, but Germany and for the first time France borrowed at negative rates
Spanish and Italian interest rates climbed on Monday, but Germany and for the first time France borrowed at negative rates, marking new tension on sovereign debt markets as eurozone ministers met

Spanish and Italian interest rates climbed on Monday, but Germany and for the first time France borrowed at negative rates, marking new tension on sovereign debt markets as eurozone ministers met.

The Spanish 10-year rate surged again above the danger level of 7.0 percent on secondary bond markets to 7.023 percent in late trading from 6.912 percent late on Friday.

A rate above 7.0 percent is believed to put a eurozone country at risk of needing a debt rescue.

The Italian 10-year rate rose to 6.088 percent from 6.016 percent.

Rates of more than 6.0 percent are considered unsustainable over the long term.

With the equivalent rate for benchmark German Bunds at 1.325 percent, the difference, or spread, with Spanish bonds rose to 5.698 percentage points, a sign of tension on sovereign bond markets.

In placements of shorter-term debt, Germany issued 3.3 billion euros ($4.06 billion) worth of six-month debt at a record low -0.03 percent.

Investors had been prepared to snap up 5.5 billion euros worth of German paper even though the negative rate essentially means they were paying Berlin to lend it money.

The French government borrowed for the first time ever at negative rates as well, raising almost 6.0 billion euros in three- and six-month debt at minus 0.05 percent and minus 0.06 percent respectively.

Among European nations, Austria, Denmark, Finland, France, Germany, the Netherlands and Switzerland have all attracted investors willing to pay to hold their debt.

One reason is that such countries forecast economic growth this year, though it might be slight, compared with those which expect business activity to contract.

France for example has estimated its economy would grow by 0.3 percent, while Spain forecasts a contraction of 1.7 percent and Italy one of 2.0 percent.

Many institutional investors are also obliged to place funds in assets that have top AAA ratings, "and there are not so many of these investments," noted Patrick Jacq, a bond strategist at BNP Paribas.

France is rated AAA by two of three main agencies, Moody's and Fitch, which makes it eligible for such placements.

In addition, the new French government "seems for now to want to stick to its fiscal targets, which reassures the markets," Jacq said.

Paris is aiming for a public deficit this year equivalent to 4.5 percent of gross domestic product (GDP), and wants to reach the EU limit of 3.0 percent in 2013.

Last week, French authorities announced 7.0 billion euros in additional taxes this year to help attain that objective.

On Monday, France borrowed another 9.373 billion euros via the sale of medium and long-term debt, and the rate paid on new 10-year debt was close to a record low point.

Demand for French 10-year bonds was two to three times the amount on offer, and the 10-year yield was 2.53 percent, slightly higher than a record low of 2.46 percent at a similar issue on June 7.

In Paris, French President Francois Hollande said Monday that controlling public finances and reducing the nation's debt were a question of France's "future sovereignty".

France will nonetheless have to make sure it does not slip off track, Jacq said, or it will quickly find its bond rates climbing higher.

The 10-year spread with Germany, which plans to cut its public deficit to 0.9 percent of GDP this year, stood above 1.0 percentage point on Monday.

Meanwhile, analysts said they did not expect a Eurogroup meeting of eurozone finance ministers in Brussels to make significant progress on issues arising out of an EU summit 10 days earlier.

That summit was presented by EU leaders as a breakthrough in structuring help for Spanish banks, by separating it from national debt, and by establishing the basis for a eurozone banking union.

"Investors doubt the capacity of the two countries (Spain and Italy) to clean up their public finances, given the worsening of the economic situation," Jacq commented.

The ministers were expected to delay most decisions concerning Greece, which wants more time to meet rescue terms, on Cyprus which wants help for its banks, and on Spanish banks, to a meeting on July 20.

Elsewhere, data from the Bank of Portugal showed that Portuguese banks, which are unable to borrow on commercial terms on the inter-bank market, borrowed 60.5 billion euros from the European Central Bank in June, setting a record.

This borrowing by Portuguese banks has accelerated since May 2011 when Portugal obtained a rescue of 78 billion euros from the European Union and International Monetary Fund.