Spanish bond yields fall after Moody's rating

The cost of borrowing for Spain fell on the traded bond market early on Wednesday with tension easing in response to a decision by Moody's rating agency not to downgrade Spanish debt to junk status. The rate, or yield, on Spanish 10-year debt fell to 5.588 percent on the secondary market from 5.805 percent late on Tuesday shortly before the Moody's decision. Moody's maintained its notation for Spanish debt at "Baa3". The decision by Moody's had been awaited with great interest on the sovereign debt market. Spain is considered to be on the verge of requesting bailout help in some form from the European Union, with some leading EU voices saying it should seek help now while others argue that it might be able to avoid a rescue. This is a top item on the agenda for a two-day EU summit opening on Thursday. The decision by Moody's means that the overall rating status for Spain enables Spanish debt to be held by investors who are not permitted by their contracts with savers to hold bonds below investment grade. A further downgrade by Moody's would have put Spanish debt into so-called junk status, and many investors would have been obliged to sell. But Spain remains at risk. Moody's, like rating agency Standard & Poor's, has conditioned its rating with a "negative outlook", meaning that the notation could be downgraded in the medium term. When a government borrows money by issuing bonds to bridge an annual budget deficit, it has to offer investors an interest rate in line with the perceptions of the risk to savers of lending. The bond is issued to offer a fixed amount of money each year in the form of interest for the life of the bond. This fixed amount, relative to the amount lent, gives a percentage return or interest or yield. Once issued, the bonds are traded on the secondary market. Since the annual amount paid out is fixed in cash terms, the only variable to reflect changing perceptions of risk attached to the loan is the value of the bond. If perceived risk falls, as in the case of Spanish bonds on Wednesday, the bond is priced upwards and the fixed income falls as a percentage of the new price. This is a signal of the interest the government must offer at its next auction. Spain got into difficulties when the yield on its bonds rose to a level, of about 7.0 percent, at which it could not afford in the long term to finance its borrowing requirements.