Spain 'Disconnect' as Bonds Rally and Jobless Rate Surges

Government employees demonstrate against the Spanish government's latest austerity measures.
Dominique Faget | AFP | Getty Images
Government employees demonstrate against the Spanish government's latest austerity measures.

Spain's unemployment rate rose to 26 percent in the fourth quarter of 2012, data from the National Statistics Institute showed on Thursday, its highest level since the end of the Franco dictatorship in the mid 1970s.

INE said 5.97 million people were unemployed at the end of the fourth quarter. Economists polled by Reuters forecast Spanish unemployment would rise to 26 percent, up from 25 percent in the previous quarter.

Despite the backdrop of record unemployment, Spain's bond market has rallied as investors have snapped up recent issues. This was most recently seen on Tuesday when Spain's treasury raised 7 billion euros ($9.3 billion) of ten-year bonds.

Officials overseeing the auction said that Investors placed orders of almost 23 billion euros for the 10-year bond sale and yields dropped to 5.43 percent, a far cry from the 7.68 percent yields seen at the height of Spain's sovereign debt crisis last July.

"Never in the history of Spain's treasury has there been such a volume of demand, whether in an auction or a syndicated sale," economy minister, Luis de Guindos told reporters after the sale, saying that the sale was a clear indication of the credibility of the Spanish economy.

However, economist Nicholas Spiro said that Spain's bond market prices are increasingly - and "dangerously" -detached from the fundamentals.

"Spain has become one of the most glaring examples of the disconnect between liquidity-driven sentiment and economic fundamentals. The two are becoming increasingly and dangerously detached from one another," Spiro, the managing director of Spiro Sovereign Strategy, a consultancy that analyses sovereign credit risk, said in a note to CNBC on Thursday.

"The scale and severity of the downturn in Spain shows no signs of abating and is likely to persist for some time yet…Make no mistake about it, foreign investors are not returning to Spain's debt market because the economy is on the mend, " he said, adding that "this is a hunt for yield eerily reminiscent of the convergence trade at the time the euro was launched."

- Reuters contributed to this report