Spanish bonds advanced, pushing two- year yields to the lowest level in almost seven weeks, after the nation sold almost double its initial maximum target of securities at an auction.
Spain’s notes gained for a fifth day as the government’s cost of borrowing for five years dropped to 4.02 percent, from 5.28 percent at the previous sale of the debt on Dec. 1. Shorter-maturity Spanish and Italian debt also rose on speculation banks bought them to use as collateral when the European Central Bank starts offering three-year loans next week. German bunds fell after a report showed euro-area services and manufacturing output shrank less than economists forecast.
“The Spanish auction went very well, they managed to sell getting on for double what they targeted,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “Spain is outperforming in the aftermath because people are taking it as positive that there’s demand for these securities.”
Spain’s two-year yields dropped 41 basis points, or 0.41 percentage point, to 3.66 percent at 4:27 p.m. London time, the least since Oct. 27, according to data compiled by Bloomberg. The 2.5 percent note due October 2013 rose 0.72, or 7.20 euros per 1,000-euro face amount, to 97.94.
Five-year yields declined 34 basis points to 4.62 percent, and rates on the nation’s benchmark 10-year bonds due in April 2021 fell 25 basis points to 5.44 percent.
Spain sold a combined 6.03 billion euros ($7.85 billion) of debt due in January 2016, April 2020 and April 2021, compared with an original target of 3.5 billion euros. Demand for the 2016 notes fell to 1.99 times the amount sold from 2.83 at the previous sale on Dec. 1. Investors bid for 2.16 times the amount of 2021 securities allotted, up from a bid-to-cover of 1.76 times at a prior auction on Oct. 20.
Italian two-year notes gained the most in a week amid speculation investors were buying them before the ECB starts its longer-term refinancing operation on Dec. 20.
With “all European banks able to borrow three-year money via the LTRO at the ECB at 1 percent, the banks have massive incentive to buy sovereign debt,” Andrew Brenner, managing director at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors, wrote in a note to clients. “This is what the ECB wants the banks to do, so the ECB does not have to buy them directly.”
ECB President Mario Draghi announced the plan to offer lenders unlimited funds for three years after the central bank’s policy meeting on Dec. 8.
Italian two-year yields fell 52 basis points to 5.55 percent after dropping 55 basis points, the biggest decline since Dec. 5.
The Italian government’s five-year borrowing costs climbed to a euro-era record yesterday when the nation sold 3 billion euros of securities due in September 2016 at an average yield of 6.47 percent, up from 6.29 percent at the Nov. 14 sale.
Euro-region governments have to repay more than 1.1 trillion euros of long- and short-term debt in 2012, according to Bloomberg data. Italy and Spain have about 146 billion euros of bonds and bills maturing in the first quarter of next year, the data show.
German bunds declined, with 30-year yields climbing from a record low, as European stocks gained and an index (SXXP) of services and manufacturing was higher than forecast.
A euro-area composite index based on a survey of purchasing managers in both industries rose to 47.9 from 47 in November, London-based Markit Economics said. Economists predicted a drop to 46.5, according to a Bloomberg News survey. A reading below 50 indicates contraction.
Thirty-year bund yields rose six basis points to 2.43 percent after dropping to a euro-era low 2.35 percent. The 10- year yield climbed three basis points to 1.95 percent.
The Stoxx Europe 600 Index gained 1.1 percent, and the euro climbed 0.3 percent to $1.3018.
Bund yields have still fallen this week as Moody’s Investors Service said on Dec. 12 it will review the ratings of all European Union countries after a summit on Dec. 8-9 failed to produce “decisive policy measures” to end the debt turmoil.
Bund yields will stay low, said Michael Leister, a fixed- income strategist at WestLB AG in Dusseldorf, Germany. “Investors are happy to park their money in bunds, when there’s really nothing concrete that came out of the EU summit.”
German government bonds have returned 9.2 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Spanish debt gained 3.2 percent and Italian bonds slid 8.1 percent, the indexes show.
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