Spanish Bonds Decline for Second Day After Retail-Sales Slide

Spain’s bonds dropped for a second day as a government report showed retail sales declined in January and investors bet the decline in yields to the lowest in two years this week was excessive.

Spain’s 10-year yields climbed the most in two weeks as the nation sold 803 million euros ($1.04 billion) of debt maturing between 2029 and 2041 at an unscheduled auction reserved for primary dealers. German bunds were little changed as European Union policy makers gathered in Brussels for a two-day summit to review national budgets. Italian bonds advanced.

“Spanish bonds are on a quite tremendous run of late,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “We were a bit surprised by the extent of the rally. We are a bit cautious now.”

Spain’s 10-year yield rose nine basis points, or 0.09 percentage point, to 4.85 percent at 4:18 p.m. London time after climbing as much as 10 basis points, the biggest increase since Feb. 26. The 5.4 percent bond due January 2023 declined 0.7, or 7 euros per 1,000-euro face mount, to 104.19.

The yield dropped to 4.70 percent on March 12, the lowest level since November 2010.

Spanish retail sales slid 10.2 percent in January from a year earlier, after dropping a revised 11.4 percent a month earlier, the National Statistics Institute said. December’s reading was the biggest decline on record, according to data compiled by Bloomberg starting in 2004.

Spain Auction

The Madrid-based Treasury allotted 365 million euros of bonds maturing in July 2041 at an average yield of 5.432 percent, down from 5.696 percent at a previous sale of the securities on Jan. 17. Spain also sold bonds due in January 2029 and July 2040.

“The fact the Treasury went for a public auction suggests they expected more demand for the bonds than the buyers they had already identified,” said Justin Knight, a rates strategist at UBS AG in London. “There seems to be interest from investors looking to cover long-term liabilities with some extra yield.”

The Treasury, which said on March 12 it had covered 30 percent of its planned mid- and long-term debt issuance for 2013, returns to the markets twice this month, to sell three-and nine-month bills on March 19 and bonds on March 21.

The extra yield investors demand to hold Spanish 10-year bonds instead of their Italian equivalents widened 11 basis points to 21 basis points. The spread shrank to four basis points on March 13, the narrowest since March 6, 2012.

‘Spread Compression’

“We continue to look for 10-year Spain-Italy yield spread compression -- albeit at a less aggressive pace as the spread is close to important technical levels -- as the Italian political deadlock remains,” strategist at Lloyds Banking Group Plc including Eric Wand, wrote today in a note to clients.

Italian 10-year yields dropped two basis points to 4.65 percent after rising to 4.96 percent on Feb. 27, the highest since Nov. 15.

The Brussels summit starting today will endorse plans for “structural” assessments of national budgets, according to a draft statement, using code for granting countries such as France, Spain and Portugal extra time to bring down deficits.

Germany’s 10-year yield was at 1.47 percent after climbing to 1.54 percent on March 8, the highest level since Feb. 25.

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

Spanish bonds returned 4.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities slid 0.1 percent, while Germany’s fell 0.7 percent.

To contact the reporters on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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

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