Spanish banks up sovereign bond holdings Spanish banks increased their holdings of the country's government bonds by more than 10 per cent in the first three months of this year, limiting the market fall out from inconclusive elections in Italy and the eurozone's bungled handling of the Cypriot bank crisis. The steep increase, shown in official data, helps explain why Spanish government bond yields, which move inversely with prices, continued to tumble steadily this year, despite outbreaks of nervousness by foreign investors. Bank holdings of Spanish government bonds rose from just over €200bn in December to almost €225bn in March, according to data from the Spanish Treasury. As a percentage of the total amounts outstanding, Spanish banks" holdings increased from 38 per cent to more than 40 per cent. Spanish banks also built up their holdings in early 2012. Then, they took advantage of more than €1tn in cheap three-year loans that had been pumped into the eurozone financial system by the European Central Bank. The suspicion of analysts was that Madrid put pressure on domestic banks to use the funding to buy the government's debt. But Justin Knight, head of European interest rate strategy at UBS, argued that this year Spanish banks had good economic reasons for increasing their holdings. It is genuine demand. It is not something they have been pushed into doing," he said. The leverage Spanish politicians have over the country's banks and the willingness of the government to intervene in that way has probably declined. Banks have been doing this because they want to - it is a way of replacing lost interest rate margin. A striking feature of eurozone bond markets this year has been the lack of "contagion" effects from the extended period of political stalemate in Italy following February's elections, which raised international concern about the eurozone's stability. March's political squabble over an international bail-out for Cyprus and proposals to impose losses on the island's bank depositors also had only a limited negative impact. The Spanish data suggest that one explanation was that the eurozone's financial "fragmentation" - which has seen banks retreating behind national borders - had reduced the volatility caused by foreign investment flows. But fragmentation has also undermined the original objective of Europe's monetary union, which was meant to promote the continent's economic integration. Yields on Spanish ten-year government bonds fell from more than 5 per cent to just above 4 per cent between late February and early May, although they have risen more recently. As well as domestic buying, yields have been pushed downwards by ripple effects of the ambitious bond buying programme launched by the Bank of Japan.