Bunds Drop After Auction as Spanish Debt Surges on ECB

German bunds fell for the first time in four days as the nation received bids for less than the maximum target at a sale of 10-year debt amid easing concern the debt crisis is worsening.

Spain’s government securities rallied, with 10-year yields falling from the highest this year, after European Central Bank executive board member Benoit Coeure signaled the institution may resume its program of sovereign-debt purchases. Italy’s bonds advanced even after borrowing costs increased as the country sold 11 billion euros ($14.4 billion) of Treasury bills. The Stoxx Europe 600 (SXXP) Index climbed 0.6 percent.

For Germany “to attract demand at such low levels requires that a sort of risk-off momentum is in the background as the bidding takes place, whereas it’s kind of taken a breather from the open this morning,” said John Davies, a fixed-income strategist at WestLB AG in London. Coeure’s comments “would be helpful to risk appetite,” he said.

The yield on German 2 percent bonds maturing in January 2022 rose five basis points, or 0.05 percentage point, to 1.70 percent at 4:33 p.m. London time. The price fell 0.485, or 4.85 euros per 1,000-euro face amount, to 102.695.

Two-year note yields climbed four basis points to 0.14 percent after sliding to 0.091 percent yesterday, the lowest since Bloomberg began collecting data on the securities in 1990.

Germany received bids for 4.11 billion euros at the auction of new benchmark 10-year bonds due in July 2022, compared with a maximum target of 5 billion euros. It sold the securities at a record-low average yield of 1.77 percent.

‘Too Rich’

“All this really means is that, given the facts available to the market today, bunds had run a bit too rich,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “For the moment we might retreat away from 1.75 percent in yield, perhaps back to the 1.80-2 percent range in the immediate future.”

The German Finance Agency said the sale was a “good result” in the context of “slightly increased uncertainty” on markets, according to an e-mailed statement. The agency said 36 of the 39 primary dealers took part in the auction.

German five-year yields yesterday dropped to a record low 0.617 percent. They may now drop as low as 0.57 percent, a key level of so-called resistance, said Credit Suisse Group AG strategists led by David Sneddon, the London-based head of technical analysis, citing trading patterns.

Selloff Not Justified

Spanish 10-year yields declined the most in almost six weeks after the ECB’s Coeure said the recent selloff in the securities wasn’t justified.

“Will the ECB intervene?” he asked at an event in Paris. “We have an instrument, the securities markets program, which hasn’t been used recently but it still exists.”

Spain’s 10-year yield dropped 10 basis points to 5.88 percent after falling as much as 15 basis points, the biggest decline since March 1.

The yields have still jumped about 1 percentage point since March 2, when Prime Minister Mariano Rajoy said the country will miss a 2012 deficit goal approved by the European Union.

Italy’s 10-year yield slid 14 basis points to 5.54 percent, and two-year yields also dropped 14 basis points, to 3.43 percent.

The Rome-based Treasury auctioned 8 billion euros of 361- day bills at 2.84 percent, up from 1.405 percent at the previous sale of similar-maturity debt on March 13. Investors bid for 1.52 times the amount offered, up from 1.38 times last month. The country also sold 3 billion euros of three-month bills at 1.249 percent, compared with 0.492 last month.

Italy is scheduled to auction as much as 5 billion euros of bonds tomorrow.

Volatility on French bonds was the highest in euro-area markets followed by Spain, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. The change in the yield was 1.4 times the 90-day average. It slid five basis points to 2.95 percent.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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