Spanish Bond Yields Drop to Lowest Since May Before Repayments

Spanish bonds rose, pushing 10-year yields to the lowest since May, before the nation makes interest and repayments of about 21 billion euros ($28.9 billion) this week and amid optimism the economy is gaining strength.

Spain’s securities advanced for the first time in three days as El Mundo newspaper said the government is predicting the economy will grow as much as 1.5 percent next year, citing internal state documents. Italy’s bonds also gained as borrowing costs declined at an auction of zero-coupon debt. German bunds were little changed before the country sells 4 billion euros of 10-year debt on Wednesday.

“Spanish bonds are supported by re-investment from the cash flows,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S (DANSKE) in Copenhagen. “There are generally good bids for peripherals. We are bullish on Spain as things seem to have improved there on many fronts.” Peripheral refers to the debt of the euro area’s lower-rated nations.

Spain’s 10-year yield fell seven basis points, or 0.07 percentage point, to 4.09 percent at 4:26 p.m. London time, the lowest level since May 9. The 4.4 percent bond maturing in October 2023 climbed 0.575, or 5.75 euros per 1,000-euro face amount, to 102.51.

The nation will pay out 16.2 billion euros of a maturing bond on Oct. 31 and 4.9 billion euros of interest, according to data compiled by Bloomberg.

Spanish Growth

El Mundo said the 1.5 percent growth rate cited in internal government documents was double the official prediction. Spain’s gross domestic product expanded 0.1 percent in the third quarter after shrinking 0.1 percent in the previous three months, according to a Bloomberg News survey before the data is released on Oct. 30.

Italy’s Treasury sold 2.25 billion euros of a zero-coupon notes maturing in June 2015 at 1.392 percent, the lowest since May 28 and down from 1.623 percent at the previous auction of similar-maturity debt on Sept. 25.

Investors bid for 1.78 times the amount offered, compared with 1.77 times last month. Italy also sold 750 million euros of inflation-linked bonds due in 2023 at a yield of 2.73 percent.

The Treasury returns to the market tomorrow with the sale of as much as 8 billion euros of six-month bills, followed the following day by an auction of five- and 10-year bonds.

Italy’s 10-year yield fell three basis points to 4.19 percent after dropping to 4.09 percent on Oct. 23, the lowest since June 5.

German Sale

Germany last sold 10-year bunds on Oct. 2 at an average yield of 1.79 percent, down from 2.06 percent on Sept. 11.

The benchmark 10-year bund yield fell one basis point to 1.75 percent after falling to 1.74 percent on Oct. 24, the least since Aug. 13.

“The market might be preparing some room for new supply, but the impact should be limited,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “German bonds will be underpinned by month-end index-extension demand.”

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

Belgium sold 1.08 billion euros of 10-year bonds at a yield of 2.493 percent, compared with 2.731 percent at the previous auction of the maturity on Aug. 27. It also sold debt due in March 2018 and September 2019.

Finland will auction as much as 1.5 billion euros of debt due in 2018 and 2042 tomorrow.

Spanish securities returned 10 percent this year through Oct. 25, according to Bloomberg World Bond Indexes. Italy’s gained 6 percent, while Germany’s fell 1.4 percent.

To contact the reporter on this story: 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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