Spanish Bonds Drop as Services Contract; Portugal to Sell Debt

Spain’s 10-year government bonds declined for the first time in three days as an industry report showed the nation’s services industries contracted in April, damping demand for the country’s assets.

The securities also dropped before the nation auctions bonds for the first time in almost three weeks on May 9. Portugal hired banks to sell debt maturing in February 2024, according to a person familiar with the matter. German 10-year yields (GDBR10) were little changed, after climbing the most since January on May 3, as a report showed euro-area services and manufacturing shrank for a 15th month in April.

“The release of the services data was lower than expected, which cooled off the excitement among investors,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “Moreover, the auction can create pressure.”

The yield on Spain’s 10-year bonds climbed seven basis points, or 0.07 percentage point, to 4.11 percent at 5:38 p.m. London time. The 5.4 percent security due in January 2023 fell 0.57, or 5.70 euros per 1,000-euro ($1,307) face amount, to 110.19. The rate dropped to 3.94 percent on May 3, the lowest since May 2010.

The yield on Portuguese securities due in October 2023 was little changed at 5.51 percent.

An index of services in Spain dropped to 44.4 in April from 45.3 the previous month, Markit Economics said today. A reading below 50 indicates contraction.

Spanish Auctions

Spain is due to sell as much as 4.5 billion euros of securities due in 2016, 2018 and 2026 at an auction on Thursday. It last sold bonds on April 18. Portugal’s debt sale will begin and be priced in the near future, subject to market conditions, according to the person familiar with the arrangements, who asked not to be identified because they’re not authorized to speak about it.

Markit said today its euro-area composite index, based on a survey of purchasing managers in manufacturing and services, was at 46.9 in April, up from an initial reading of 46.5 on April 23, and compared with a median estimate of 46.6 in Bloomberg News survey of 25 economists.

German 10-year bunds yielded 1.24 percent. The rate fell to 1.15 percent on May 2, the lowest level since July 23, when it matched the record low of 1.127 percent.

Analysts from Barclays Plc and Royal Bank of Scotland Group Plc last week reduced their yield forecasts for the securities after the European Central Bank cut interest rates on May 2.

Yield Forecasts

The yield will rise to 1.40 percent at end this quarter, Barclays analysts including head of European fixed-income strategy Laurent Fransolet in London wrote in a note on May 3. That compares with a previous forecast of 1.60 percent.

RBS expects the yield to fall to 1.1 percent at the end of June, compared with 1.15 percent previously, analysts led by London-based head of European rates strategy Andrew Roberts wrote in a note the same day.

The average response of 24 analysts in a Bloomberg survey, with the most recent projections given the heaviest weightings, calls for the 10-year bund yield to increase to 1.42 percent by the end of this quarter.

The ECB cut its main refinancing rate on May 2 and signaled it was open to a negative deposit rate to boost the economy.

Euro-area retail sales dropped 0.1 percent in March from the previous month, when they fell a revised 0.2 percent, the European Union’s statistics agency in Luxembourg said today.

German bonds returned 0.8 percent this year through May 3, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities gained 8.9 percent and Italian debt earned 5.1 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

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

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