Spain's 10year borrowing rate dips to 2005 level

Spain's interest rate for borrowing 10-year funds fell below 3.0 percent on Friday for the first time since 2005, in a further sign that the eurozone debt crisis is fading. On the secondary market, where debt already issued is traded, the interest rate or yield indicated by the rising value of the bonds fell to 2.996 percent briefly during morning trading, but then rose to 3.0 percent. The yield on existing debt is a baseline indicator of what a country must offer to raise funds the next time it issues equivalent bonds. Ten-year bonds are considered to be the main barometer of a country's standing on the eurozone bond market. As confidence in the creditworthiness and general state of an economy rises, in this case regarding eurozone member Spain, investors become more inclined to buy the bonds for the fixed income stream they carry. As the price of the bond rises, the fixed interest falls automatically relative to the new higher value of the bond. Spain, the eurozone's fourth-biggest economy, emerged from its downturn last year after a decade-long property bubble burst in 2008, tipping the economy into a double-dip recession and wiping out millions of jobs. At Credit Agricole CIB bank, economist Frederick Ducrozet said: "In general, in terms of macroeconomics and of capital flows, everything is going in the direction of an easing of rates for eurozone peripheral countries." As economic data for the eurozone improves, investors have been moving large amounts of funds for several months into buying bonds issued by eurozone countries which had been regarded as high risk because of their overloaded public finances. The head of the French central bank, Christian Noyer, said recently that this inflow of capital was largely why the value of the euro was strong. In the last year, investors have also reduced their exposure to many emerging economies, pulling funds back to where risk appears less and the opportunities for gain greater. Ducrozet said that the trend of flows into weaker eurozone countries was likely to continue because "either the improvement continues, which is the case in Spain regarding the public deficit and unemployment in particular, or it is not the case but the European Central Bank is a back-stop." The ECB has signalled that it is ready to take new measures to support the eurozone economy, particularly to ward off any risk of deflation. However, the latest data shows that inflation is picking up from unusually low levels, and analysts say the ECB may decide to hold interest rates when it meets next week. The bond market was also boosted by firm eurozone data on Friday. Purchasing managers' data showed that output by the manufacturing sector continued to grow in April and was broadly based across all eurozone countries. However, investors on the bond market were waiting mainly on Friday for the monthly data on the state of the jobs market in the United States.