It was a sign of just how bad Spains news had been in
recent weeks, when the yield on Spanish ten-year bonds eased
down on Monday on official news that Spain had returned to
The cause for celebration was that Spains economy
shrank by less than expected declining by 0.3 percent in
the first three months of this year according to a provisional
estimate from the National Statistics Office. This was,
thankfully, no worse (though no better, either) than the fall
in the final three months of last year.
However, Mondays confirmation that Spain is in
recession has focused institutional investors minds on a
key question: How much further are the countrys assets,
buffeted by a breakneck succession of bad news, likely to
The yield on ten-year Spanish government bonds closed at
5.80 percent on Monday down 9 basis points (bp) from
Friday, but 82bp above Marchs opening level.
Despite the rise, some analysts think this a low interest
rate to pay for the debt of a country that was on Thursday
downgraded two notches by Standard & Poors to BBB+
not far off junk bond status. Spains high and
growing unemployment a quarter of the workforce
also raises questions about its capacity to shrink its deficit,
which was 8.5 percent of gross domestic product in 2011.
Unemployment doubly widens the fiscal gap by depressing tax
revenue and increasing government spending.
Investors may, therefore, start demanding a higher premium
for holding Spanish debt which is a relatively modest
1.67 percentage points higher than in January 2009, when
S&P withdrew Spains AAA status.
If Spains sovereign debt yields rise further, bringing
down the price of other Spanish assets, the 7 percent level may
provide a back stop: This is the point at which analysts
believe the European Central Bank is likely to intervene with
aggressive buying through its Securities Market Program
Yet many analysts think this may only provide a temporary
respite for Spanish bonds. Despite heavy SMP buying in late
2011, yields for euro zone sovereigns only fell decisively in
January, in the weeks after the ECBs first three-year
long-term refinancing operation (LTRO). ECB president Mario
Draghi has signaled strongly that he is prepared to consider
such measures again.