Spanish Bonds Rise After Auction as EU Leaders Gather for Summit

Spain’s government bonds rose for a third day after the nation sold more than its maximum target at a debt auction and as European Union leaders gathered in Brussels for a two-day summit.

The country’s 10-year yields dropped to the lowest level since April as German Chancellor Angela Merkel told lawmakers in Berlin that stability was taking hold after three years of crisis in the euro area. Spanish securities have surged this week after Moody’s Investors Service said it would keep the country’s credit rating at investment grade. France auctioned notes and inflation-linked bonds today and Ireland sold bills.

“The Spanish auction went as well as could be expected,” said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. “Yields are a bit lower and the volumes they managed to do on the 10-year was a positive. Some positive comments out of the European meetings today should also offer some support.”

Spain’s benchmark 10-year yield fell 12 basis points, or 0.12 percentage point, to 5.35 percent at 4:05 p.m. London time, the lowest level since April 2. The 5.85 percent bond maturing in January 2022 gained 0.875, or 8.75 euros per 1,000-euro ($1,310) face amount, to 103.575.

The government sold a combined 4.61 billion euros of securities due in 2015, 2016 and 2022, compared with a maximum target of 4.5 billion euros.

The Treasury auctioned 1.5 billion euros of 10-year bonds at an average yield of 5.458 percent, down from 5.666 percent when they were last sold on Sept. 20. Investors bid for 1.88 times the amount on offer, versus 2.85 times in September. The 2015 securities were sold at an average yield of 3.227 percent and the 2016 notes at 3.977 percent.

EU ‘Solidarity’

Merkel, addressing German lower-house lawmakers hours before the EU leaders meeting, proposed a European Union “solidarity” fund to bolster competitiveness in struggling member countries.

“To give all member states the opportunity then to improve their competitiveness and to actually be able to implement these commitments, I propose that we introduce a new element of solidarity,” she said in her speech today at the Reichstag parliament building.

French President Francois Hollande said the subject of today’s summit was not fiscal union by banking union.

“The only decision we have to take, to confirm in fact, is the putting into place of a banking union by the end of the year, notably the first step, which is the banking supervision,” he told reports in Brussels.

Moody’s Rating

Moody’s said on Oct. 16 it would leave Spain’s credit rating at investment grade, citing a reduction in the risk of the nation losing market access because of the European Central Bank’s willingness to buy its bonds.

The extra yield that investors demand to hold Spain’s 10- year bonds instead of its two-year notes shrank for the first time in six days. The spread narrowed eight basis points to 262 basis points.

France sold 7.97 billion euros of two-, three-, four- and five-year notes. The five-year securities attracted an average yield of 0.92 percent, down from 0.98 percent on Sept. 20. The nation also auctioned inflation-linked bonds maturing in 2021.

German 10-year yields were little changed at 1.62 percent after rising 19 basis points over the previous three days.

“Bunds are taking a pause for breath after the recent sell-off ahead of the start of the EU summit,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh.

Italian Notes

Italian notes fell for the first time in seven days, with the two-year yield climbing seven basis points to 2.07 percent.

The Italian Treasury said it received orders of more than 10 billion euros over the past three days for the inflation- linked bonds it is selling to retail investors, more than its two previous offers combined. The order period ends today.

Italy’s index-linked securities have returned 23 percent this year, headed for their best year according to indexes compiled by Bank of America Merrill Lynch dating back to 2003.

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

German bonds returned 2.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities rose 3.5 percent, and French debt gained 8.1 percent.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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