Spain continued to bleed yesterday from the wound that was re-opened on Wednesday. For the second day in a row, confidence in the Spanish markets flagged. The situation has not been this bad since the start of 2012. Doubts about whether the government could reduce public debt to 5.3% of the GDP in 2012 and the impact that financial sector restructuring is having on the banks' balance sheets and solvency were both catalysts.
Deceptive business data from Germany, France and the rest of the euro zone confirmed that the threat of recession is still real in the region, exacerbating concerns about Spain.
Simmering on the coals of the not-yet-over sovereign debt crisis, those arguments were more than enough to reignite tensions again. Sale-stricken, 10-year bond yields rose from 5.40% to 5.49%, the highest level since January. We are looking at nine consecutive days of increases, an interval during which yields have shot up 50 basis points.
At the same time, this increase caused the risk premium, measured by the difference between yields on Spanish and German 10-year notes, to jump from 342 to 358 basis points, which is also a high not seen since January. Adding to the increases, Credit Default Swaps (CDS) against Spanish defaults rose from 423 to 433 basis points, marking a 3-month high for this instrument.
Unlike Wednesday, when Italy's debt fared better than Spain's, yesterday Italy was hit hard as investors casts new doubts about the country. Yields on Italian 10-year notes went from 4.99% to 5.09% and its risk premium ascended from 302 to 318 basis points. Despite all this, Italian debt still remained 40 basis points beneath similar debt in Spain.
