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Spanish Bonds Fall as Auction Demand Wanes; Italian Debt Drops

Spanish government bonds fell, pushing 10-year yields to the highest level this month, as demand dropped when the nation sold a combined 4.57 billion euros ($5.99 billion) of securities at an auction.

Longer-maturity debt led declines as investors submitted bids for 1.62 times the amount of the 13-year bonds sold today, down from 2.85 times at the previous auction in January. The so-called bid-to-cover ratio also worsened for three- and five-year notes. Spain’s 10-year yield fell to the lowest in three years last week after the European Central Bank cut its main refinancing rate to boost growth. Italian bonds also declined.

“The market is taking a breather, reflecting the fact that yields have fallen so much in recent weeks,” said Pablo Zaragoza, a strategist at Banco Bilbao Vizcaya Argentaria SA (BBVA) in Madrid. “There’s a digestion effort, it’s not the market losing confidence. The auctions were good, the top of the range target was surpassed and the rates were at lower levels than we have seen in recent auctions.”

Spain’s 10-year bond yield climbed nine basis points, or 0.09 percentage point, to 4.19 percent at 4:31 p.m. London time, after rising to 4.21 percent, the highest level since April 29. The 5.4 percent security maturing in January 2023 fell 0.77, or 7.70 euros per 1,000-euro face amount, to 109.495.

The government sold the 13-year bonds at a yield of 4.336 percent, compared with 5.555 percent at the previous auction on Jan. 10. The three-year notes were allotted at 2.247 percent, compared with 2.792 percent on April 18, and the five-year yield dropped to 2.789 percent from 3.257 percent last month.

‘Funding Continues’

Spain raised 58.1 billion euros from sales of medium- and long-term debt in the first four months of this year at an average cost of 2.68 percent, compared with 3.01 percent last year, the Economy Ministry said today in a statement.

“The key thing is that the funding continues and this is another step toward achieving Spain’s issuance plan,” said Orlando Green, a strategist at Credit Agricole Corporate & Investment Bank in London. “They sold the debt at multi-year lows in terms of yields and that’s a positive. Yields can continue to go a bit lower.”

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

Italian 10-year bonds dropped for the first time in three days with the yield rising five basis points to 3.88 percent.

German Bunds

Germany’s bunds were little changed with the 10-year yield at 1.27 percent after dropping as much as three basis points. The rate climbed to 1.31 percent on May 7, the highest level since April 11.

European government bonds have rallied since European Central Bank President Mario Draghi pledged in July to do “whatever it takes” to defend the euro and as policy makers around the world add stimulus to boost growth.

In addition to the ECB, policy makers in Australia, India and South Korea have all cut interest rates this month. The Bank of Japan said April 18 it plans to purchase more than 7 trillion yen ($70.5 billion) of bonds.

Irish two-year yields dropped to a record 0.742 percent yesterday, while French 10-year yields fell to an all-time low 1.659 percent on May 2.

‘Huge Fall’

“There’s been a huge fall in peripheral yields,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch, speaking on Bloomberg Television’s “Countdown” with Mark Barton and Anna Edwards. “We are wary because the underlying economic data in these economies remain deeply troubling. There are still deep recessions going on in the periphery, huge and rising unemployment, and this all spells big trouble down the road in terms of paying back debt.”

Greek bonds fell after a government report showed unemployment climbed to a record 27 percent in February as the recession left more than six in 10 young people out of work.

The 10-year yield climbed eight basis points to 9.65 percent after dropping to 9.44 percent, the lowest since October 2010.

Draghi said at the ECB’s latest policy meeting on May 2 that the “risks surrounding the economic outlook for the euro area continue to be on the downside.” The ECB reiterated that view in its monthly bulletin today.

Spanish bonds returned 8.8 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities gained 5.3 percent and German bonds rose 0.7 percent.

To contact the reporters on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

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

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