Spanish Note Yields Climb From 8-Year Low Amid Fed Taper Concern

Spain’s government bonds erased gains, with five-year yields climbing from the lowest since 2005, as investors assessed the prospect of the Federal Reserve reducing stimulus earlier than some economists predict.

Italian bonds also gave up gains as stocks declined, damping demand for higher-yielding assets. Germany’s two-year notes fell, pushing yields toward the highest since September, after an auction of the securities. The Fed will start slowing its $85 billion in monthly bond purchases at its meeting next week, according to 34 percent of economists surveyed Dec. 6 by Bloomberg, an increase from 17 percent on Nov. 8.

“The market mood seems to be one of risk-off amid mounting speculation that the Federal Reserve is likely to start tapering sooner rather than later,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “It started with stocks in the U.S. and spread to other higher-yielding assets including peripheral bonds.”

Spanish five-year yields were little changed at 2.59 percent at 4:38 p.m. London time after falling to 2.52 percent, the lowest since September 2005. The price of the 3.75 percent security due October 2018 was 105.24.

American lawmakers unveiled a budget deal yesterday that would ease automatic spending cuts by about $63 billion over two years and reduce the deficit by $20 billion to $23 billion. The agreement comes after a report last week showed the jobless rate fell to a five-year low.

Italy’s five-year yield increased one basis point to 2.60 percent after declining as much as five basis points. The Standard & Poor’s 500 Index (SPX) slipped 0.7 percent, while the Stoxx Europe 600 Index lost 0.5 percent.

Spreads Tighten

Aa breakup of the euro area is no longer priced in by markets and yield spreads between lower-rated peripheral nations and core countries have narrowed, European Central Bank Council member Ewald Nowotny said today.

“Considering the rates of 10-year sovereign bonds, there has been a considerable change and improvement,” Nowotny, who is also the governor of Austria’s central bank, said at a press conference in Vienna. “The segmentation between core countries and the periphery has been reduced considerably. The speculation on a breakup of the euro area is over.”

Spain’s 10-year yields were little changed at 4.04 percent after falling below 4 percent for the first time since Nov. 7. The additional yield investors get to hold the securities instead of benchmark German bunds shrank to as little as 217 basis points, the narrowest since June 2011.

Inflation Expectations

Benchmark 10-year bund yields fell one basis point to 1.82 percent as a report confirmed consumer-price increases in the euro area’s biggest economy accelerated in October. Germany’s annual inflation rate, calculated using a harmonized European Union method, rose to 1.6 percent from 1.2 percent in October.

The German 10-year break-even rate, a gauge of market inflation expectations derived from the yield gap between regular and index-linked bonds, rose one basis point to 1.47 percentage points.

Germany allotted 4.38 billion euros of two-year notes at an average yield of 0.21 percent, compared with 0.1 percent at a previous auction on Nov. 13. The nation’s two-year yields increased one basis point to 0.23 percent after climbing to 0.25 percent on Dec. 6, the highest level since Sept. 12.

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

Spain’s government bonds returned 12 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italy’s earned 7.6 percent and German securities lost 1.7 percent.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@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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