Spanish Bonds Fall as Speculation Fed to Taper QE Damps Demand

Spanish 10-year bonds fell, extending their first monthly decline since August, as concern the U.S. Federal Reserve will pare debt purchases dented the appeal of fixed-income assets.

Italian securities also declined. The bonds of both nations aren’t compelling investments and Pacific Investment Management Co. is cautious on the debt, Andrew Balls, head of European portfolio management at the company said today. German 10-year bund yields climbed to the highest level in three months as a report showed inflation accelerated more than economists expected in May after falling to the lowest level since August 2010 the previous month.

“The tightening in spreads for peripheral countries has made them more sensitive to risk-free yield shifts,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “Italian and Spanish bonds are no longer cheap and investors are becoming increasingly reluctant to take outright long positions in these markets.”

Spain’s 10-year yield climbed 11 basis points, or 0.11 percentage point, to 4.40 percent at 4:20 p.m. London time. The yield has increased 27 basis points since April 30. The 5.4 percent bond maturing in January 2023 fell 0.895, or 8.95 euros per 1,000-euro ($1,294) face amount, to 107.69.

“We are neutral-to-underweight on Italy and Spain,” Pimco’s Balls said at a media briefing in London. “Our bias is to be quite cautious. We prefer looking at absolute value not relative value. Spain and Italy offer reasonable risk-reward but are not compelling.”

An underweight position means the fund holds fewer securities than the benchmark it uses to track performance.

German Inflation

The annualized inflation rate in Germany, calculated using a harmonized European Union method, jumped to 1.7 percent from 1.1 percent in April, the Federal Statistics Office in Wiesbaden said. Economists had forecast an increase to 1.4 percent, according to the median of 22 estimates in a Bloomberg survey. Price increases erode the value of the fixed payments on bonds.

A separate report showed German unemployment rose more than economists estimated in May.

The number of people out of work climbed a seasonally adjusted 21,000 to 2.96 million, the Nuremberg-based Federal Labor Agency said. That’s the fourth consecutive monthly increase. Economists predicted an increase of 5,000. The adjusted jobless rate held at 6.9 percent, just above a two-decade low of 6.8 percent.

Germany (GDBR10)’s 10-year bund yield rose four basis points to 1.54 percent after climbing to 1.55 percent, the most since Feb. 25.

Italian Auction

Italy sold 8 billion euros of six-month bills at an average yield of 0.538 percent, up from 0.503 percent at a previous sale on April 26. Ten-year Italian yields added 15 basis points to 4.19 percent.

The extra yield, or spread, that investors get for holding U.S. Treasury 10-year notes instead of German bunds increased to as much as 73 basis points today, the most since June 2010. The spread has jumped from 44 basis points at the end of 2012.

Securities in the Bank of America Merrill Lynch Global Broad Market Index have fallen 1.3 percent in May, poised for the steepest loss since April 2004.

Spanish government bonds handed investors a loss of 0.8 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities lost 0.2 percent and German bonds dropped 1.4 percent.

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