Spanish bonds fell, increasing the additional yield investors demand to hold the securities instead of benchmark German bunds, amid concern government borrowing costs will rise at auctions next week. Spain’s 10-year debt dropped for the fifth consecutive day and Portuguese securities slid amid concern the euro area’s debt crisis is spreading to banks across the region. European Central Bank Governing Council member Ewald Nowotny said the bank’s unconventional measures have to be withdrawn as the economy strengthens. German bunds slid, headed for a weekly decline. “We’ve got a lot of supply next week in Spain, and that’s making investors a little bit wary toward Spanish government bonds,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for money managers. “The market is looking for action there to tackle the banking problems, particularly the regional banks.” The yield on the Spanish 10-year bond rose 10 basis points to 5.4 percent as of 1:29 p.m. in London, up from 5.08 percent on Dec. 3. The 4.85 percent securities maturing in October 2020 fell 0.695, or 6.95 euros per 1,000-euro ($1,326) face amount, to 95.82. That increased the yield premium investors demand for the bonds instead of benchmark German bunds to the most in more than a week. The yield on similar-maturity Portuguese debt climbed 14 basis points to 4.63 percent and Irish yields added 12 basis points to 8.3 percent. The yield on 10-year Belgian bonds increased four basis points to 4 percent. Wider Spreads The cost of insuring against losses on bonds of financial companies in Europe surged. Credit-default swaps on the Markit iTraxx Financial Index of banks’ and insurers’ subordinated debt jumped as much as 17 basis points to 337 basis points, the highest level since April 2009, according to JPMorgan Chase & Co. Moody’s Investors Service said yesterday it may downgrade 10 Portuguese banks. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments had the biggest two-day gain since June. The ECB said yesterday that some lenders in the euro area are “excessively reliant on central bank liquidity.” Governing Council member Mario Draghi said in a Financial Times interview that officials are discussing “concrete proposals” to deal with banks overtly reliant on ECB funding. International and domestic institutions in Ireland increased their reliance on ECB funding to 136.4 billion euros on Nov. 26, from 130 billion euros at the end of October, according to statistics published on the Irish central bank’s website today. The central bank only updates the ECB funding position of domestic lenders at the end of every month. Exit Policy Draghi, who is also Governor of the Bank of Italy, said in the interview that bond purchases must not compromise the central bank’s independence. The ECB’s bond purchases were necessary to ensure the smooth functioning of markets. “I’m only too aware that we could easily cross the line and lose everything we have, lose independence, and basically violate the treaty” that set up the ECB, the newspaper cited Draghi as saying. Nowotny told reporters in Vienna today that “the extraordinary measures can’t become normality.” The central bank “certainly aims to continue the exit policy as far as the broader economic environment allows it,” he said. The difference in yield, or spread, between German bonds and Spanish and Italian securities widened this week as policy makers set out their positions on the possibility of selling joint euro-region debt to help resolve the region’s financial crisis. With a European Union summit set for next week in Brussels, officials from Italy, Luxembourg, Belgium and Greece said the proposal should be explored, prompting resistance from Germany, France and Austria. Stem Contagion French President Nicolas Sarkozy said today that “common bonds would make governments less responsible.” Fitch Ratings, which said yesterday that ECB bond purchases may need to be increased to stem contagion from the sovereign- debt crisis, published a report today saying it expects negative bank-rating actions in the coming year “to be concentrated in peripheral euro-zone economies.” Spanish banks reduced their borrowings from the ECB in November, a Bank of Spain official said on Dec. 2. The liquidity situation that Spanish lenders have to contend with is “serious” while not “dramatic,” said the official, who asked not to be identified, without giving a figure of the borrowings. The bund yield rose two basis points to 2.96 percent today, and is up from 2.86 percent a week ago. To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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