Spanish government bonds fell for the first time in three weeks on speculation the nation will struggle to fund itself after its largest region applied for financial aid.
Ten-year yields climbed the most in six weeks after Catalonia’s credit rating was cut to junk by Standard & Poor’s after the region said it would seek 5 billion euros (US$6.27 billion) from a domestic rescue fund.
Moody’s Investors Service said a review of Spain’s finances would be extended.
Italian bonds also declined. German bonds gained for a second week as investors sought safer assets.
“Spain is moving closer to a request for a full-scale bailout,” said Alessandro Giansanti, a fixed-income strategist at ING Groep NV in Amsterdam.
“Moody’s comments highlighted the risk for Spain to be downgraded to junk status,” he said.
The Spanish 10-year yield rose 44 basis points, or 0.44 percentage point, last week to 6.86 percent at 5pm in London on Friday, the most since the period ended July 20.
The 5.85 percent bond due in January 2022 fell 2.88, or 28.80 euros per 1,000 euro (US$1,256) face amount, to 93.14.
Catalonia said on Tuesday it would seek almost a third of the 18 billion euro fund created in July by the government of Spanish Prime Minister Mariano Rajoy.
Valencia was the first to tap the fund with a request on July 20.
S&P lowered Catalonia’s long-term credit rating to “BB,” or two levels below junk, from “BBB-,” and said it maintained a negative outlook due to the risk the region’s credit profile would deteriorate if political tensions with the central government escalate.
Moody’s said its review of Spain’s debt rating for a possible downgrade will probably continue through this month and that a possible Spanish call for further European aid may tip its credit rating to junk.
Italian 10-year bonds snapped three weeks of gains, with the yield climbing 13 basis points to 5.85 percent. German 10-year bond yields declined two basis points to 1.33 percent.
The European Central Bank (ECB) is set to convene on Thursday amid speculation ECB President Mario Draghi will come up with a comprehensive plan to buy Spanish and Italian bonds to cap their borrowing costs.
Spain’s bonds dropped 3 percent this year through last Thursday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Italian bonds gained 11 percent, and Germany’s gained 4 percent.