Out of the paella pan, into the fire: Spanish bonds nudge 7%

Spain has come over all Italian, with bond yields suggesting it's ripe for a bailout. And things aren't looking great in France, either.

by Emma Haslett

It’s beginning to look increasingly like Italy isn’t the only country at the mercy of the bond markets. At 6.975%, debt yields for Spain were grazing the 7% mark this morning (the critical point at which most economists agree it’s probably time for a bailout), a 14-year high. Of course, this could be nothing more than the uncertainty caused by a looming election, which takes place on Sunday. Then again, considering it’s practically a given that the job of governing will fall into the (ostensibly) capable hands of the right-wing Popular Party, that’s unlikely. And the bad news is that the high bond yield epidemic could be spreading to France.

The yields were pushed up by an auction of 10-year bonds this morning, which ended rather disastrously. The Spanish government only managed to sell off €3.56bn (£3.04bn) of the €4bn worth of bonds it had on offer – which suggests investors are super-cautious about the prospects of the country making good on its debts. Now that yields are so high, there’s a risk that clearing houses will begin to ask for extra collateral to trade Spanish debts. Let’s not forget that just last week, a similar demand by clearing house LCH.Clearnet caused Italy’s yield on 10-year bonds to tip above the 7% mark.

Of equal, if not more, concern is France, which also issued €6.98bn of various bonds this morning, and was met with a similarly muted demands. Thus, yields on 10-year bonds have now risen to 3.75%. Admittedly, that’s nowhere near the lofty heights of either Italian or Spanish debt – but considering France is the eurozone’s second-largest economy (and the world’s fifth-largest), a conventional bailout wouldn’t really be an option. So government economists will have their fingers crossed that this is as far as it goes.

With all this turmoil in the bonds market, it’s no surprise, then, that central banks are transferring their attentions to gold. According to a quarterly report by the World Gold Council, the industry’s lobby group, central banks bought up 148.4 tonnes of gold in the third quarter of the year – more than they’ve bought at any time in the past 40 years. The WGC was, understandably, reluctant to identify the central banks that have done the most buying (is it us, or have Bank of England governor Sir Mervyn King’s glasses taken on a certain lustre lately?) – but whoever is behind the buy-up has pushed up the price of bullion to $1,920.30 a troy ounce, 600% higher than it was a decade ago. That’s a serious amount to pay for a bit of bling…

- Image credit: Flickr/cesarastudillo

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