Spanish Yields Fall to 4-Month Low as Shutdown Stokes Fed Bets

Spanish sovereign bonds rose, pushing 10-year yields to the lowest level in four months, amid speculation a partial shutdown of the U.S. government will deter the Federal Reserve from slowing its debt-purchase program.

Portuguese securities advanced for a fourth day as investors bet the Fed will keep buying assets under its quantitative-easing plan as a bulwark against any slowdown in the economy caused by the first U.S. shutdown in 17 years. U.S. politicians also need to agree on increasing the debt ceiling this month. Italian bonds gained as Prime Minister Enrico Letta fought Silvio Berlusconi’s efforts to overthrow his ruling coalition. German bonds fell as demand for safer assets waned.

“The market is assessing what the shutdown might mean and what the impact on the debt ceiling might be,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S (DANSKE) in Copenhagen. “This could lead to the Federal Reserve adding more QE to counter any potential slowdown in economic recovery, and that would benefit risky assets, including peripheral bonds.”

Spain’s 10-year yield fell 13 basis points, or 0.13 percentage point, to 4.17 percent at 4:53 p.m. London time after dropping to 4.16 percent, the lowest since May 22. The 4.4 percent bond due in October 2023 rose 1.035, or 10.35 euros per 1,000-euro ($1,354) face amount, to 101.86. The rate decline was the steepest since July 1.

The yield on 10-year Portuguese securities declined nine basis points to 6.59 percent after falling to 6.51 percent, the least since Aug. 28.

Partial Shutdown

The partial U.S. shutdown will put as many as 800,000 federal employees out of work today after Congress failed to break a partisan deadlock. Lawmakers voted against a funding bill linked to changes in President Barack Obama’s health-care legislation. The shutdown may lead to further confrontation on how to raise the U.S. debt limit before an Oct. 17 deadline to avert a default.

Fed policy makers maintained their monthly bond purchases at $85 billion at their most recent meeting on Sept. 17-18. Fed Chairman Ben S. Bernanke said in May the central bank could slow the pace of stimulus if the labor market improved.

Italy’s bonds advanced even amid concern Letta’s five-month old government is on the verge of collapse.

Berlusconi withdrew his support for the administration on Sept. 28 and five ministers from his People of Liberty party quit the Cabinet. Letta said he’ll request a confidence vote for tomorrow to save his government.

The yield on Italy’s 10-year 4.5 percent bond maturing in March 2024, which became the new benchmark security today, dropped 14 basis points to 4.43 percent.

Bunds Decline

Germany’s 10-year bund yield climbed two basis points to 1.80 percent after dropping to 1.74 percent yesterday, the lowest level since Aug. 13.

Ireland’s bonds rose for a second day as the National Treasury Management Agency said the nation had deferred a decision on selling debt until early 2014.

The yield on Ireland’s 3.9 percent security due in March 2023 dropped six basis points to 3.83 percent.

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

Spanish bonds returned 9.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italian securities rose 3.7 percent and Germany’s lost 1.4 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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