Spanish Bonds Rise on Rescue Fund Debt-Buying Speculation

Spanish government bonds advanced for a third day on speculation euro-area leaders will deploy their bailout facilities to buy sovereign debt.

Spain’s five-year yields headed for their biggest three-day drop since January as the nation sold more securities than planned at an auction. Spanish banks need as much as 62 billion euros ($78 billion) of capital, according to a private-sector report published today in Madrid. German bunds rose for the first time in three days after a report showed euro-area services and manufacturing contracted for a fifth month in June.

“There’s a risk that something more positive might happen in the euro region,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “There’s talk that the rescue funds might be able to intervene in the Spanish and Italian markets, and that means that people who were short these markets are exiting their positions,” he said, referring to bets prices will fall.

Spain’s five-year note yield tumbled 24 basis points, or 0.24 percentage point, to 5.93 percent at 4:58 p.m. London time. It reached 5.85 percent, the lowest since June 12. The yield has fallen 62 basis points in the past three days, the largest slide since the period through Jan. 12. The 4.25 percent security maturing in October 2016 advanced 0.87, or 8.70 euros per 1,000- euro ($1,258) face amount, to 93.705.

Investors have increased the premium they charge to lend to Spain and Italy amid concern the two nations will struggle to curb their debt levels.

Coeure ‘Mystery’

European Central Bank Executive Board member Benoit Coeure told the Financial Times that the European Financial Stability Facility has the ability to reduce yields. “Certainly it’s a mystery why the EFSF was allowed almost a year ago to undertake secondary market interventions and governments have not yet chosen to use that possibility,” Coeure said in an interview with the newspaper published today. The Frankfurt-based ECB confirmed the comments.

German Chancellor Angela Merkel said allowing direct sovereign debt purchases through the euro-area bailout fund “is not up for debate” at present. French President Francois Hollande told reporters at a press conference after the Group- of-20 nations summit in Los Cabos, Mexico, this week, that he backs the idea.

Spain’s 10-year yield climbed to a euro-era record 7.29 percent on June 18 after the nation sought a bailout of as much as 100 billion euros for its banks on June 9, amid speculation it will need still more aid. The government said today it will make a formal bailout request in the coming days, based on the results of the stress tests.

Spanish Auction

The nation sold 2.2 billion euros of debt maturing in 2014, 2015 and 2017, exceeding the maximum target of 2 billion euros. The notes maturing in April 2014 were sold at an average yield of 4.706 percent, compared with 2.069 percent when they were last auctioned in March. Demand for the securities was 3.97 times the amount allotted, up from 2.81 times in March.

Ten-year Spanish yields fell 13 basis points to 6.61 percent and the yield on similar-maturity Italian bonds declined two basis points to 5.75 percent.

“Demand was strong for the 2014 and 2015 bonds and the market is rallying,” said Gianluca Ziglio, an interest-rate strategist at UBS AG in London. “That Spain was able to issue that much is a good sign. The front-end of the curve remains underpinned by domestic demand,” he said, referring to shorter- maturity debt.

Sovereign Bailouts

Italy and Spain will probably require sovereign bailouts in the next 12 months as they stumble over their auctions, Jamie Stuttard, Fidelity Investment’s head of international bond portfolio management in London, said in a telephone interview on June 19.

German 10-year bond yields fell eight basis points to 1.53 percent. The rate climbed 20 basis points in the past two days and reached 1.64 percent yesterday, the highest since May 3. French 10-year yields declined four basis points to 2.64 percent after sales of almost 10 billion euros in debt.

A composite index based on a survey of purchasing managers in services and manufacturing in the 17-nation euro area was at 46, the same reading as in May, London-based Markit Economics said today in an initial estimate. Economists had forecast a drop to 45.5, the median of 15 estimates in a Bloomberg News survey showed. It’s the fifth reading in a row below the 50 level that separates contraction from expansion.

Rate Cut

“Against this backdrop, the chance of an ECB rate cut, perhaps in July, appears to be growing,” Ben May, a European economist at Capital Economics in London, wrote in a note to clients. “Much bolder action will be needed to restore growth to the region and the peripheral economies in particular,” he wrote, referring to nations including Spain and Italy.

Volatility on Spanish bonds was the highest in euro-area markets today followed by Finland, according to measures of 10- year debt, the spread between two- and 10-year securities and credit-default swaps.

German debt returned 2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 5.9 percent, and Italian bonds rose 8.1 percent, the indexes showed.

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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