Spanish yield curve flattens, along with Europe’s fortunes

July 20, 2012

Ten-year Spanish government bond yields hit their highest levels since the euro was created – above 7 percent – on growing doubts that the euro zone’s fourth largest economy will be able to avoid a full-blown sovereign bailout.

News that Spain’s heavily indebted eastern region of Valencia would ask Madrid for financial help reinforced concerns the country may eventually run out of funds. The rubber-stamping of a rescue package for Spain’s troubled banking sector did little to allay concerns.

Short-dated bonds came under particular pressure, flattening the Spanish yield curve further in a sign of mounting credit worries. Five-year bond yields hit a euro-era high of 6.928 percent, flirting with the widely dreaded 7 percent mark.

Charles Diebel, head of market strategy at Lloyds Bank says:

The more pressure you put on the front end … it is saying that the near-term risk of default is going up through the roof. It’s exactly the dynamic you saw in all of the other curves before they went into a bailout. You actually saw things like the Greek curve invert.

Asked when such an inversion — where short-term yields would actually surpass long-term ones — may take place for Spain, he said:

It always happens faster than you think. They haven’t got the summer, put it that way.

The other issue, of course, are the implications for Italy. Adds Diebel:

If they can push Spain into a bailout then they are going to go straight for Italy.

Not very reassuring then, that in late European trading on Friday, ten-year Italian bonds yielded 6.20 percent – only a whisker away from the 6.23 percent offered by equivalent bonds issued by Ireland, one of the countries to have already received a sovereign bailout.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see