Spanish 10-year bonds advanced, snapping their biggest decline in almost two months, as Deputy Prime Minister Soraya Saenz de Santamaria said the cabinet had approved the nation’s 2013 budget.
Italian securities rose after borrowing costs fell at a 6.65 billion-euro ($8.6 billion) auction of five- and 10-year debt. Spanish bond risk headed for its biggest monthly drop before Prime Minister Mariano Rajoy approves a budget that will cut the deficit by at least 18 billion euros next year. The draft law will be presented to Parliament on Sept. 29. German 10-year yields were little changed after falling to the lowest level in three weeks.
“If they stick to their fiscal guns, that will please the markets and it will also please the European Central Bank,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “We are taking a pause of breath after the selloff yesterday but if there are any signs the Spanish are toning down their commitment to fiscal consolidation then the bond markets will punish them.”
Spanish 10-year yields dropped 12 basis points, or 0.12 percentage point, to 5.95 percent at 5 p.m. London time. They climbed 32 basis points yesterday, the most since Aug. 2. The 5.85 percent bond due in January 2022 rose 0.825, or 8.25 euros per 1,000-euro face amount, to 99.295. Similar-maturity Italian bond yields fell nine basis points to 5.12 percent.
Credit-default swaps on Spain fell nine basis points to 393 and are down from 518 basis points Aug. 31. The contracts, which peaked at 640 basis points on July 24, are also heading for a record quarterly decline.
Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Rajoy is defying anti-austerity protesters and dissent from regional leaders as he struggles to convince investors he can contain the crisis and avoid asking for a full bailout. The rally in Spanish borrowing and bond insurance costs was fueled by the ECB’s bond-purchase program announced on Sept. 6.
“The Spanish budget could bode well for their bonds,” said Ralf Umlauf, a research analyst at Landesbank Hessen- Thueringen in Frankfurt. “Today’s Italian auction was quite successful. We think this is positive for the periphery’s bonds, especially Spain and Italy.”
Germany’s 10-year bund yielded 1.46 percent after declining to 1.439 percent, the lowest level since Sept. 5. Benchmark 10- year bund yields are headed for a sixth quarter of declines, the longest run since 1998. The rate has dropped 12 basis points since the end of June.
Italy sold 2.93 billion euros of bonds due in November 2022 at an average yield of 5.24 percent, the central bank said. That’s down from a yield of 5.82 percent at a similar auction on Aug. 30. The nation also sold 2.72 billion euros of debt due in 2017 and 1 billion euros of floating-rate notes.
“The Italian auctions were well received by investors, in particular domestic insurance and bank accounts,” Chiara Manenti, a fixed-income strategist at Intesa Sanpaolo SpA in Milan, wrote in a client note today. Italy has now met 81 percent of its gross issuance planned for 2012 and that will probably rise to 88 percent by the end of October, meaning that “the risk of refunding for Italy is limited,” she said.
Volatility on Irish bonds was the highest in euro-area markets, followed by Ireland, according to measures of 10-year or equivalent-maturity debt, the spread between two- and 10-year securities and credit-default swaps.
German bunds returned 3.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities were little changed, while Italy’s earned 14 percent.