Spanish Notes Rise After Bill Sale

Spanish government notes climbed, trimming seven days of losses, as the nation met its maximum target at a bill auction even after speculation the country will need a sovereign bailout pushed up borrowing costs.

Two-year yields fell from a six-and-a-half month high reached yesterday as an European Union official said the conditions attached to Greece’s aid program may be modified once the nation has formed a government. German bunds fell,, with 10- year yields rising the most in two months on speculation the Federal Reserve will do more to boost the U.S. economy, damping demand for the safest assets. Greek bonds declined.

“The best thing about today’s bill auction is that they’ve sold the target volume,” said John Davies, a fixed-income strategist at WestLB AG in London. At the sale, the “jump in yields is huge and this isn’t sustainable,” he said. “While there might be some knee-jerk relief that they’ve managed to sell the paper, I doubt that will extend too far.”

Spain’s two-year note yield fell 16 basis points, or 0.16 percentage point, to 5.29 percent at 4:35 p.m. London time after rising to 5.59 percent yesterday, the highest since Nov. 30. The 3.4 percent security due April 2014 advanced 0.27, or 2.70 euros per 1,000-euro ($1,262) face amount, to 96.73.

Spain sold 2.4 billion euros of 12-month bills at an average rate of 5.074 percent, 2.1 percentage points more than the yield paid at a May 14 sale, the Madrid-based Bank of Spain said. It also auctioned 639.3 million euros of 18-month debt at 5.107 percent, compared with 3.302 percent last month.

Spanish Rates

Ten-year Spanish rates declined 12 basis points to 7.04 percent, while yields on similar-maturity Italian debt slipped 17 basis points to 5.91 percent.

Spain, which requested as much as 100 billion euros to support its banks on June 9, plans to sell 2 billion euros of notes due in 2014, 2015 and 2017 in two days.

“These decidedly elevated yield levels leave a question- mark firmly in place as regards the sustainability of Spain’s public finances while doing nothing to temper speculation as to how long the country might hold out before looking for a more comprehensive bailout,” Richard Mcguire, a senior fixed-income strategist at Rabobank International in London, wrote in a note to investors. It’s “certainly not a favorable precedent ahead of Spain’s auctions.”

Austerity Changes

Group of 20 leaders meeting in Mexico focused their response to Europe’s financial crisis on stabilizing banks as the International Monetary Fund raised its lending capacity to shield the rest of the world economy. China, Brazil, India, Mexico and Russia boosted their pledges to the global firewall.

“Unless we see firm commitments from the G-20, things will continue to deteriorate and yields will go higher,” said Niels From, chief analyst at Nordea Bank AB (NDA) in Copenhagen. “The focus will probably shift back to the immediate situation in the euro region and particularly in Spain.”

Greek election winner Antonis Samaras began a second day of talks to form a coalition as he raced to forge a government that keeps bailout aid flowing.

The nation’s economic-performance targets, linked to funds pledged by international lenders, may be revised sometime before September, a European official told reporters in Brussels today.

German Volatility

Greek 10-year bonds fell, pushing the yield on the securities 13 basis points higher to 26.43 percent. The price declined to 17.115 percent of face value.

Volatility on German bonds was the second-highest in the euro-area markets today following Finland’s debt, according to measures of 10-year debt, the spread between two- and 10-year securities and credit-default swaps.

Fed Chairman Ben S. Bernanke said on June 7 that Europe’s situation poses “significant risks” to the U.S. economy and that the Fed was prepared to take action if necessary.

The central bank’s so-called Operation Twist program, in which it’s selling $400 billion of Treasuries maturing in three years or less and buying an equal amount of bonds with a maturity of six years to 30 years to cap borrowing costs, is set to expire this month.

German 10-year yields rose 12 basis points to 1.53 percent, after touching 1.55 percent yesterday, the most since May 10. They climbed as much as 13 basis points, matching the biggest intra-day increase since April 11.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, slid to minus 16.9 from 10.8 in May. That’s the steepest decline since October 1998. Economists forecast a drop to 2.3, according to the median of 38 estimates in a Bloomberg News survey.

German bonds handed investors a return of 3.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds gained 6.2 percent and Spanish debt lost 7.4 percent, the indexes show.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; 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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