Italian and Spanish bond yields rise; euro falls

Publication date: 12 June 2012
Author: Mark Deans, Moneycorp

There was “panic” yesterday when the Olympic flame blew out on the Isle of Lewis. Even behind the shelter of a lone piper in a haggis barn, the strong wind made it impossible to relight the torch. Only after a 30-MILE DASH to Stornoway was it possible to get it going again. The story was told by that rarest of newspapers, The Scottish Sun.

Meanwhile, back in the home of the flame, politicians were trying to make capital out of what they see as the easy terms of the Spanish bailout. In Greece, as in Ireland and Portugal, there has been a sense-of-humour failure about the way Spain has apparently received preferential treatment from bailout bosses. The main fear outside the country is that it will enhance the appeal of the anti-austerity Syriza party, which was only slightly behind the conservative New Democracy in the last opinion polls before Sunday’s vote.

It is not just the earlier bailout recipients that were left unimpressed by the Spanish rescue. Having made the obligatory relief-motivated purchases of euros, equities and Spanish government bonds yesterday morning, investors gave the bailout a reality check and found it wanting. Rightly or wrongly they are assuming the EU loans will rank ahead of other Spanish government bonds, making existing debt a riskier proposition than it already was. There is also bemusement that Italy will be underwriting up to a fifth of the loan. Investors see something faintly ludicrous about Italy paying the thick end of 6% to borrow money through the debt market only to then lend it to Spain at 3% or 4%.

So the Spanish bailout did help confidence and the euro, as presumably it was intended to do, but only for about four hours and seventeen minutes. When London got going the rot had already set in and by the end of the day the euro – together with stock markets, oil, gold and commodity currencies – had given up the early morning’s windfall gains. The euro starts today unchanged from Friday’s opening level against the US dollar and the yen. Over the same period it is down by half a cent against the pound and the Australian dollar, and by two cents against the Kiwi.

More dangerously, Spanish and Italian government bonds yields went up by about 20 basis points yesterday when, according to the EU plan, they should have gone down. Higher yields imply greater reluctance among investors to buy the bonds. The real test will come on Thursday when Italy auctions €4.5bn of two- to eight-year bonds.

Closer to hand – and back on planet sensible – today’s figures for UK industrial and manufacturing in April are unlikely to do any great favours for sterling. If the monthly changes are even minutely positive it will be a result. The same applies to the NIESR estimate of UK economic growth in the three months to May.

There are no statistics from Euroland and none of any consequence from North America. Anyone with time on their hands might care to peruse the “Consolidated Financial Statement of the Eurosystem” when the ECB publishes it at two o’clock this afternoon.