Skeptic European Bond Investors Question Spanish Loans

Devan Biswas
11 Jun, 2012
New York City

European markets surged after ministers in the region agreed to support Spanish bank bailout. Market euphoria was tempered as investors searched for details and worried of rising debt of Spanish government and bond yields barely budged.

[R]2:30 PM Frankfurt – European markets surged after ministers in the region agreed to support Spanish bank bailout. Market euphoria was tempered as investors searched for details and worried of rising debt of Spanish government and bond yields barely budged.[/R]

Markets in European trading trimmed early surge after Spain requested bank bailout and euro zone ministers approved with a commitment to offer as much as €100 billion.

The sharp surge at the opening across the region faced a wall of worries as investors searched for details and digested the broader economic scenario in Spain and in Italy.

The IBEX index in Madrid soared as much as 6% and cut the gains to 2.5% in the afternoon. The benchmark index FTSE 100 index in London gained 1%, DAX index in Germany added 2% and CAC 40 index in France advanced 1.8%.

The surge in Madrid was welcome by traders but the index is still down more than 25% since early February and is the worst performing market in the region followed by similar weaknesses in Milan.

What is still not clear is what size of loan Spain is likely to request and where the funds are likely to be come from and with what conditions. Regardless of where the funds are distributed, Spain is still receiving loans and that will certainly increase its debt.

Spanish banks jumped in Madrid trading. Bankia added 8%, Banco Santander soared as much as 4% and BBVA increased more than 5.5%.

Banks in France, Italy and in Portugal gained. Credit Agricole added 3.5%, UniCredit gained 1.5% and Intesa Saopaolo increased as much as 3.6%.

However, sovereign bond markets were convinced and yields on Spanish bonds only eased a fraction. The yield on the 10-year bonds of Spain declined 5 basis points to 6.12% and the Italian benchmark yields eased 12 but in the afternoon lost all the gains.

Italy still needs to sell €35 billion of debt a month for the rest of the year and fewer foreign investors are participating in recent debt sales. Italy is scheduled to offer €6.5 billion treasury bills on June 13.

Germany auctioned €4 billion in six months treasury bills that averaged 0.07% yield, the lowest in several decades. The stress in the bond market drove more investors in the perceived safety of the German bunds.

The euro edged up and traded near $1.261.

Stock Movers

Rheinmetall AG gained 26 cents to €33.78 and the conglomerate’s defense subsidiary was in focus after Indian investigation suspended its subsidiary from participating in defense contract and accused the company of peddling influence and attempting to bribing government officials.

TeliaSonera’s debt rating was reaffirmed by Fitch Ratings with a ‘stable’ outlook. The long term issuer debt rating and its unsecured rating was confirmed at ‘A-‘ according to a statement released by Fitch which highlighted its market position and stable and strong cash flow.

Volkswagen AG surged 4% to €126.65 after its luxury auto division Audi reported unit sales in May increased 13.7% to 128,900, record for the month. The company also lifted its annual unit sales outlook to 1.4 million from 1.3 million 2011 on stronger than expected sales in China and the U.S.

Unit sales in the first five months to May increased 12.1% to 600,200 vehicles.