Sovereign bond yields exceed 7%

Following Italian ten-year bonds, the yield on Spanish sovereign bonds exceeded the critical threshold of 7% per annum. Investors rushed to sell Spanish government securities after the Spanish Ministry of Finance on Thursday was forced to reduce the placement volume by almost €500 million and increase the yield on securities to 6.975%.

The yield on ten-year Spanish government Eurobonds, as a result of a sharp increase from the very beginning of trading, surpassed 7% per annum for the first time since April 1997. By 12.00 Moscow time, the rate had risen to 7.117% per annum, which was 0.65 percentage points higher than Thursday’s close. The continuous rise in yields continued for the second month in a row, with the rise accelerating in recent weeks. Back in early October, Spanish government bond yields were significantly lower, at 4.9–5.1%. The highest yield in the eurozone currently remains on Greek government bonds - 28.8% per annum.

This is the second time in the past two weeks that a European country's 10-year sovereign bond yield has reached 7%. The previous time the yield on Italian government securities exceeded the 7% per annum level was last week, after Silvio Berlusconi announced his resignation as Prime Minister of Italy ( see Kommersant on November 10 ). Then the market started talking about the inevitability of financial assistance to Italy from the ECB and the IMF. An aggravation of the situation in the Italian debt market was avoided only after the intervention of the ECB, which intervened in support of Italian and Spanish bonds. In 2010, Greece, Ireland and Portugal faced the question of receiving international assistance precisely after the yield on their ten-year securities exceeded 7% per annum.

By selling Spanish government bonds, investors responded to the results of the auction held the day before by the Spanish Ministry of Finance, which placed ten-year bonds. The Ministry of Finance was forced to reduce the volume of the placement from €4 billion to €3.56 billion. The yield on the securities amounted to 6.975%, whereas on the previous placement it was only 5.433%. On the same day, France raised €3.332 billion at an auction through the placement of government bonds maturing in July 2016; the yield on five-year securities was 2.82% per annum, which exceeded the yield at a similar auction on October 20 - 2.31%.

According to NB Trust analyst Roman Dzugaev, the past auctions confirmed investors’ fears about another powerful round of the spread of the debt crisis in the eurozone. “The situation on the secondary market for Italian government debt is somewhat different due to the fact that the new government received a vote of confidence in the upper house of parliament, the reform program presented by the Cabinet, as well as large-scale purchases of government securities by the ECB helped bring down the yield on securities to 6.75%,” notes Mr. Dzugaev.

The situation in the three eurozone economies: France, Italy and Spain will in the near future be perhaps the main factor in the European debt crisis, analysts say. “Statements by the French authorities that France still has the right to bear the title of safe haven are unlikely to be taken seriously by the market. In Italy, the risk is the speed of painful economic reforms. In Spain there are general elections scheduled for next Sunday,” notes Roman Dzugaev. “At the same time, even if the most favorable scenarios are realized in all three countries, we do not expect a quick exit from the markets of increased volatility and risk aversion.”

Vitaly Gaidaev

Spain receives risk premium