Spain’s Yield Spread Shrinks to 2-Year Low as Retail Sales Rise

Spain’s bonds rose, sending 10-year yields to the least relative to German bunds since June 2011, as an increase in retail sales added to evidence the nation’s economic recovery is gaining momentum.

Spanish yields dropped to the lowest since May before the government pays interest and bond maturities of about 21 billion euros ($28.9 billion) this week. Italian (GBTPGR10) securities advanced for a second day after the country sold 8 billion euros of bills at the lowest yield since July. Finland auctioned 1.5 billion euros of debt due in 2018 and 2042. German bunds were little changed after 10-year yields fell to the lowest in 11 weeks.

“We’ve seen a lot of economic improvement for Spain in recent months and some progress in structural reforms, fueling demand for Spanish bonds,” said Felix Herrmann, a research analyst at DZ Bank AG in Frankfurt. “The latest strong performance is due to Spanish coupon and redemption payments this week. This is providing liquidity that needs to be reinvested.”

Spain’s 10-year yield fell five basis points, or 0.05 percentage point, to 4.05 percent at 4:37 p.m. London time after dropping to 4.04 percent, the lowest level since May 6. The 4.4 percent bond maturing in October 2023 climbed 0.425, or 4.25 euros per 1,000-euro face amount, to 102.865.

The extra yield that investors demand to hold the securities instead of benchmark German bunds shrank four basis points to 231 basis points after falling to 229 basis points, the narrowest since June 8, 2011.

Retail Sales

Spain’s retail sales increased 2.2 percent from a year earlier, after falling a revised 4.4 percent in August, the National Statistics Institute said. A report tomorrow will show the economy expanded 0.1 percent in the third quarter, according to a Bloomberg News survey.

The nation’s bonds returned 11 percent this year through yesterday, according to Bloomberg World Bond Indexes, on optimism the economy is strengthening and the European Central Bank will backstop the nation’s debt. Italy’s gained 6.2 percent, while German securities lost 1.4 percent.

Spain 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.

Italian Auction

Italy sold six-month bills at an average auction yield of 0.629 percent, the lowest since July 10, when the rate fell to 0.599 percent. The nation plans to sell as much as 6 billion euros of securities due in five and 10 years tomorrow.

Italian 10-year yields declined five basis points to 4.15 percent. The spread over bunds narrowed four basis points to 241 basis points. It contracted to 227 basis points on Aug. 19, the least since July 2011.

Finland sold 500 million euros of 30-year bonds at an average yield of 2.756 percent, up from 2.547 percent at a sale on June 18. Investors bid for 1.69 times the amount allotted, versus 2.55 in June. The nation auctioned 1 billion euros of five-year notes at 0.924 percent.

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.

German 10-year bund yields fell one basis point to 1.74 percent after dropping to 1.73 percent, the lowest level since Aug. 13.

Bunds stayed little changed after ECB Governing Council member Ewald Nowotny said policy makers were unlikely to cut their benchmark or deposit rates.

“I do not think that having a negative deposit rate is a realistic perspective, but I also do not see a realistic perspective of lowering the main policy rate,” Nowotny was cited by Market News International as saying.

Germany is scheduled to sell 4 billion euros of 10-year bonds tomorrow. It last sold the securities at an average yield of 1.79 percent on Oct. 2.

-- Editors: Nicholas Reynolds, Keith Jenkins

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

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

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