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Traders look at computer screens at the Madrid Bourse July 23, 2012. Investors grew more concerned on Monday that Spain may need a full bailout after a second region, Murcia, indicated it would need government help, likely following Valencia in tapping a government programme to shore up its finances. (SUSANA VERA/REUTERS)
Traders look at computer screens at the Madrid Bourse July 23, 2012. Investors grew more concerned on Monday that Spain may need a full bailout after a second region, Murcia, indicated it would need government help, likely following Valencia in tapping a government programme to shore up its finances. (SUSANA VERA/REUTERS)

Spanish bond market faces imminent crisis Add to ...

Spain’s bond market signalled imminent crisis Wednesday as five-year bond yields climbed briefly above ten-year yields.

This inversion of the yield curve – longer duration yields falling below shorter issues – is a sign that investors believe risks are higher in the short term. Bond markets in Spain are telling policy makers that bailout decisions cannot wait.

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Since 2007, inverted yield curves have been a definitive indicator of funding stress, an inability to borrow money at acceptable rates in the open market.

The market yield on sovereign debt is also the rate of interest a government must pay to lenders. In Spain for example, the 3.2 per cent jump in 10-year yields to 7.6 per cent over the past 12 months has vastly increased interest expenses for the financially-strapped government.

With a normal upward-sloping yield curve, when a government finds 10-year yields unpalatable it would issue shorter-term bonds where the rate is lower.

In crisis periods short-term debt issues are repeated until the market balks, sending short-term yields higher. When the yield curve inverts, investors are signalling a lack of trust the government’s ability to repay the principal on even short term debt.

The yield on two-year Spanish government bonds jumped 0.46 basis points this morning in a clear sign the market is reluctant to buy any of the country’s debt, regardless of term.

Spain needs to borrow a minimum €34-billion from fixed income markets in the latter half of 2012. With two-year yields at 6.25 per cent, they are running out of ways to accomplish this at rates they can afford.

 

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