German government bonds are mixed midday Wednesday, with the yield curve steeper, albeit in thin volume trading with U.S closed for the Memorial Day holiday and a number of European countries also observing Whit Monday/Pentecost holidays. The main focus was on Spain, as markets digested news from Bankia Group late Friday that it had asked the state for E19bln, which would effectively nationalise the bank. This fuelled risk-aversion bid into Bunds after the yield on the Spain 10-year Bono rose to 6.48% — highest since Nov 30, 2011 and 10-year yield spread vs Bunds widening to +511bps. The LCH 10-year spread vs eurozone AAA core widened to +456bps. However, Spain yield spread pared back its widening on back of Reuters story that Spain government plans to recapitalise lenders through state bonds and the ECB hasn’t objected, citing unnamed sources. However, markets remain skeptical about whether the Bankia bailout so far is enough. Recent Bank of Spain estimates that banks have around E184bln in ‘problematic’ loans out of the E300bln in real-estate related assets held.
EasyForexNews Research Team