Spanish Bond Yields Surge to Record High

Yields on short-term Spanish bonds reached a fourteen-year high on Tuesday, signaling that an election victory on Sunday for the conservative People’s Party has done little to instill faith in the government’s ability to see Spain through the financial crisis.

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Spain’s Treasury issued a total of 2.98 billion euros of 3- and 6-month bills today, at the top of the range set by the Treasury of between 2 billion and 3 billion euros

“It doesn’t look great, the continuing trend toward ever higher yields to get anything done, it has to be concerning,” said Gary Jenkins, head of fixed income at Evolution Securities.

“The yields are a reflection of where their paper trades in the secondary market but if it wasn’t for the European Central Bank there wouldn’t be a Spanish or Italian bond market,” he added.

The ECB restarted its bond-buying program in August, concentrating most of its efforts on Italian and Spanish debt in the secondary market. Italy and Spain have the third- and fourth-largest economies in the euro zone, respectively.

However, the ECB has shown little sign that it intends to give in to political pressure to increase the size of its purchases, buying only 8 billion euros of bonds last week.

Spain’s outgoing Socialist government was able to keep borrowing costs manageable through reforms and austerity measures, but as the financial crisis drags on, threatening contamination of more substantial and influential economies, traders have begun dumping periphery debt.

So on Sunday, Spaniards handed the People’s Party the largest parliamentary majority in 30 years, despite the absence of concrete course of action. Now uncertainty over the new government’s plans for the economy is fueling investor concern.

The average yield on the 3-month Treasury bill more than doubled to 5.11% on Tuesday, from 2.292% one month earlier. Today’s yield is the highest since the bill was re-introduced in 2003. The Treasury sold 2.01 billion euros of the 3-month bill.

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The 6-month bill saw yields climbing as high as 5.227% this morning, up from 3.302% at the last auction. The Treasury sold 966 million euros of the 6-month bill.