Spanish Bonds Surge After Auction; Bunds Drop on Rate Decision

Spain’s government bonds surged, with two-year yields falling to the lowest level since October 2010, after the nation sold more securities than planned at its first debt auction this year.

Spanish 10-year yields fell below 5 percent for the first time since March and Italian bonds also rallied as optimism the European financial crisis is easing spurred demand for the debt of so-called peripheral countries. German bonds slumped, with two- and 10-year yields climbing to the highest levels in 11 weeks, after the European Central Bank refrained from cutting its key interest rate and President Mario Draghi said the decision was “unanimous.”

“The auction went very well and the size was also higher than the market was expecting,” said Mohit Kumar, the head of European interest-rate strategy at Deutsche Bank AG in London. “German bonds are falling as Draghi is being on the constructive side. That is paring down market expectations of an ECB rate cut in the near future.”

Spain’s two-year yields slid 29 basis points, or 0.29 percentage point, to 2.10 percent at 4:33 p.m. London time, after falling to 2.08 percent, the lowest since Oct. 28, 2010. The 3.3 percent note due in October 2014 rose 0.515, or 5.15 euros per 1,000-euro ($1,322) face amount, to 102.08.

The country’s 10-year yield declined as much as 24 basis points to 4.89 percent, the lowest level since March 2.

Yield Spread

Spain sold a combined 5.8 billion euros of securities, above its target of 5 billion euros.

Investors bought January 2018 notes at an average yield of 3.988 percent, versus 4.68 percent at the previous auction on Nov. 8. The new March 2015 securities, which include collective- action clauses that limit investors’ rights to oppose writedowns, were sold at an average yield of 2.476 percent. It also sold 2016 notes.

The yield difference, or spread, between Spanish two- and 10-year yields increased to the most in more than four months, based on closing-market rates.

The spread widened to 282 basis points, the most since Sept. 7, the day after ECB President Draghi announced a plan to buy short-dated securities when requested by indebted nations.

“When you stack some of these countries like Spain and Italy against the alternatives in global fixed-income, they look like pretty good yields,” Andrew Bosomworth, managing director at Pacific Investment Management Co. in London, said on Bloomberg Television’s “The Pulse” with Francine Lacqua. “On a relative-value basis, I think this part of the world is worth investing in.”

Italy's Bonds

Italy’s two-year yields declined as much as 27 basis points to 1.28 percent, the least since April 2010. Ten-year yields dropped 15 basis points to 4.13 percent, the lowest since November 2010.

The gap between Italy’s two- and 10-year yields widened to 285 basis points, the most since Nov. 8.

The ECB left its main refinancing rate at a record-low 0.75 percent today, as forecast by 50 of 55 economists surveyed by Bloomberg News. Five had predicted a reduction to 0.5 percent.

The unanimous decision by policy makers and Draghi’s comment on market stability “clearly defuse any rate cut speculation,” said Peter Schaffrik, the head of European interest-rate strategy at Royal Bank of Canada in London. “We do not think there will be a cut, and we do not think there will be any move in the ECB rate at all in 2013.”

German Bunds

German 10-year bunds snapped a three-day advance after Draghi, speaking at a press conference in Frankfurt, said the euro-area economy should gradually recover in the second half of this year.

Germany’s two-year note yield climbed as much as five basis points to 0.105 percent, the highest since Oct. 26. The 10-year rate rose eight basis points to 1.56 percent, after reaching 1.57 percent, also the highest since Oct. 26. The yield dropped six basis points during the previous three days.

Volatility on Spanish bonds was the highest in euro-region markets today, followed by those of the Netherlands and Italy, according to measures of 10-year or equivalent-maturity debt, the yield spread between two- and 10-year securities, and credit default swaps.

Luxembourg Prime Minister Jean-Claude Juncker said today the euro crisis may have passed its most difficult phase.

“I think the worst probably is over, but what we still have to do is difficult,” Juncker, who also heads the group of euro-area finance ministers, told a European Parliament committee today in Brussels.

Spanish bonds returned 1.1 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities gained 1.4 percent and German debt lost 1 percent.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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

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