Spain’s Bonds Drop a Third Day Before Nation Sells Debt Tomorrow

Spain’s government bonds declined for a third day before the nation sells as much as 4 billion euros ($5.41 billion) of securities tomorrow, when European Central Bank policy makers meet to set interest rates.

Italian securities also dropped as the nation sold 22.3 billion euros of inflation-linked bonds to individual investors. Benchmark German (GDBR10) bunds were little changed as a report showed factory orders increased in September and the nation auctioned five-year notes. Bank of America Corp., Royal Bank of Scotland Group Plc and UBS AG predict the ECB will cut its benchmark rate this week. Spain plans to offer debt due in five, 10 and 13 years tomorrow.

“Spanish bonds have cheapened before the sale tomorrow and I don’t think the market will have any problem taking the supply down despite some uncertainty about the ECB,” said Peter Chatwell, an interest-rate strategist at Credit Agricole Corporate & Investment Bank in London. “Our view is that the ECB won’t do much tomorrow. They will probably want to wait until they get new economic projections next month.”

The yield on Spanish 10-year bonds rose five basis points, or 0.05 percentage point, to 4.15 percent as of 5 p.m. London time. The 4.4 percent security due October 2013 fell 0.37, or 3.70 euros per 1,000-euro face amount, to 102.01.

Spain last sold 10-year debt on Oct. 3 at an average yield of 4.269 percent, compared with 4.503 percent at a previous auction on Sept. 5.

The rate on Italian 10-year bonds climbed four basis points to 4.21 percent after dropping as much as five basis points.

Italian Sale

Italian government bonds rose earlier as demand for inflation-linked securities being sold to individual investors climbed to a record. Italy’s debt sale is the single biggest-ever by a European government after the 18 billion euros secured by Italy over four days in October last year. The four-year bond, dubbed BTP Italia, carries a 2.15 percent coupon that proved attractive to buyers even amid weak consumer prices.

The ECB, led by President Mario Draghi, will keep its main rate at a record-low 0.5 percent, according to all except three of 70 economists surveyed by Bloomberg News.

Strategists added predictions for an interest-rate cut this year after a report on Oct. 31 showed euro-area inflation unexpectedly slowed to 0.7 percent in October, the least since November 2009. The ECB’s inflation target is just below 2 percent.

“The market is focusing on the ECB meeting tomorrow and U.S. jobs data on Friday,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “I don’t expect the central bank to cut rates this month, but Draghi is likely to be dovish in order to pave the way for a cut in December.”

German Yields

Germany’s 10-year yields were at 1.74 percent after declining as much as two basis points.

Factory orders in the nation jumped 3.3 percent in September from August, when they fell 0.3 percent, the Economy Ministry said. Analysts forecast an increase of 0.5 percent, according to a Bloomberg News survey.

The German government sold 3.27 billion euros of five-year notes at an average yield of 0.71 percent, compared with 0.81 percent at a previous auction on Oct. 9. Investors bid for 2.3 times the amount allotted versus 2 times in October.

Portuguese bonds rallied, with 10-year yields falling to the lowest in five months, amid signs the fiscal situation has improved. Portugal is likely to meet its fiscal target this year, European Union Economic and Monetary Affairs Commissioner Olli Rehn said yesterday.

Portuguese 10-year yields declined 20 basis points to 5.89 percent after sliding to 5.86 percent, the least since June 6.

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

Spanish securities gained 11 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italy’s returned 6.5 percent, while Germany’s lost 1.3 percent.

To contact the reporters on this story: Neal Armstrong in London at narmstrong8@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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