My, my, have the tides churned. Spanish yields now overtake Italy’s. Soaring Spanish borrowing costs have underscored the fading impact of of the European Central Bank’s bond purchases and stoked investor nervousness over euro zone debt.
Spanish 10-year government bond yields rose above 6 percent on Monday for the first time since the beginning of December, fuelling concerns that Madrid could fail to meet deficit targets as the country acknowledged it has probably tipped into its second recession since 2009.
Spanish 5-year government bond yields rose to 5.10%. That would raise the risk of the euro zone’s fourth largest economy being pushed into seeking an international bailout. It is looking more and more likely that Spain is going to have some form of a bailout.
Six percent was last reached in December and is psychologically important for markets. The rise typically accelerates after that level, putting yields on course for 7 percent beyond which debt costs are seen as unsustainable.
The cost of insuring Spanish debt against default also hit record highs in early trading. Contagion fears also pushed Italian 10-year bonds higher. The euro fell below a key level at $1.30 on the concerns about Spain to hit $1.2995, its lowest in two months, before recovering to be down 0.4 percent at $1.3010.
According to the most recent estimates from the World Bank, Spain was the 9th largest economy in the world in 2009 with a GDP of $1.4 trillion. From a pure geography perspective, it is the second largest country by land size, after France, in the European Union.
It also has a government budget that is more than four times that of Greece, and a commensurate debt balance. Spain, which has already completed almost half its debt issuance plans this year, faces a fresh test of investor confidence when it sells 12- and 18-month Treasury bills later on Tuesday, ahead of more significant auctions of two- and 10-year bonds on Thursday.