Spanish bonds fell for a second day as Cyprus’s banks reopened for the first time in almost two weeks amid concern fallout from its financial turmoil will spread to Europe’s other high debt and deficit nations.
Spain’s 10-year yields climbed to the highest level in three weeks after Cyprus’s Finance Ministry said controls on bank withdrawals and overseas transfers will be in force for seven days to limit capital flight. Portuguese and Irish bonds also dropped. German 10-year yields fell to the lowest in almost eight months after unemployment in the Europe’s largest economy unexpectedly increased, underpinning demand for safer assets.
“The way EU officials approached the crisis in Cyprus is having spillover to other peripheral countries,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “It becomes now highly likely that in every future bailout there will be a private-sector involvement.”
Spain’s 10-year yield rose three basis points, or 0.03 percentage point, to 5.11 percent at 11:18 a.m. London time after rising to 5.15 percent, the highest level since March 4. The 5.4 percent bond maturing in January 2023 dropped 0.23, or 2.30 euros per 1,000-euro face amount, to 102.205.
Ireland’s 10-year yield climbed two basis points to 4.28 percent and Portugal’s rose seven basis points to 6.44 percent.
Cypriot banks had been shut since March 16 when the European Union presented a plan to force losses on depositors in exchange for a 10 billion-euro ($12.8 billion) bailout. They will close at 6 p.m. local time, Yiangos Dimitriou, head of the central bank’s audit department, said yesterday in comments broadcast on state-run CyBC television.
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Fears that growth in China is weakening and falling Asian stocks conspired with the on-going European debt crisis to give investors greater concern for the safety of US debt. As a result, two-year Treasury yields fell to a record low today while 10-year yields fell below 3 percent.
“If you look at the Chinese stock market, it looks particularly ugly, and China has a tendency to lead in the ‘rest-of-the-world’ category,” said a trader in London.
In Europe the FTSEurofirst index of top European shares lost around 1.9 percent, with euro zone bank funding worries ahead of the repayment of 442 billion of European Central Bank emergency loans adding to concerns.
“A lot of (negative sentiment) is still emanating from concerns over Europe and the European banking system and the impact that might have if it rolls out globally,” said David Page, economist at Investec.
Analysts were caught off guard today on news that Japan’s unemployment rose to 5.2 percent in May from 5.1 percent the previous month. It was expected that unemployment would actually fall slightly to 5.0 percent in May.
Household spending fell 0.7 percent in May when compared to May 2009. Again, this was a surprise as the forecast called for a 0.4 percent increase year-over-year.
“Today’s reports show Japan’s economy is clearly slowing down” after growing at an annual 5 percent pace in the first quarter, said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo. “Consumer spending is weakening because the impact from government stimulus measures is fading.”
The pound climbed to a 19-month high against the euro yesterday as nervous investor’s anxiously eye a deadline later this week requiring many European banks to repay loans taken out a year ago. The pound rose almost half a cent to 1.2327 euros, its highest level since the immediate aftermath of the financial crisis in November 2008.
“Markets are tense going into the end of the long-term refinancing programme, along with [Wednesday's] three-month auction,” said John Hydeskov, senior currency analyst at Danske.