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Greek, Spanish Bonds Gain Amid Optimism Debt Crisis Is Easing

Greek government notes led gains by securities from the euro region’s most indebted countries as speculation that the Mediterranean nation will default subsided, boosting demand for riskier assets.

German government bonds declined for a fifth day. Spanish bonds gained for a fourth day after Greece’s lawmakers approved a budget-cutting package and banks lined up behind debt-rollover plans. Ten-year German yields have jumped 20 basis points this week, the biggest five-day increase in seven months.

“The main driver is the optimism about Greece,” said Glenn Marci, a strategist at DZ Bank AG in Frankfurt. “There’s clearly a risk-on mentality. Bunds have served well as a safe haven. We have seen some flows out of them this week.”

Two-year Greek note yields fell 50 basis points to 26.23 percent as of 4:25 p.m. in London. The 4.6 percent security, maturing in May 2013, gained 0.54, or 5.40 euros per 1,000-euro ($1,452) face amount, to 70.81, trading at 70 percent of face value for the first time since June 13 based on closing prices. Ten-year bond yields were little changed at 16.34 percent.

Notes from Europe’s most indebted nations have gained this week as Germany’s biggest banks agreed on a proposal to replace maturing Greek debt with new securities to help stave off the currency bloc’s first sovereign default.

Almost two years into a sovereign-debt crisis, Europe is still seeking to quarantine the turmoil that has forced Greece, Ireland and Portugal to seek aid deals.

German Yields

Finance ministers from the 17 euro-area nations have scheduled a conference call for tomorrow evening to discuss a second Greek aid package that is dependent on private-sector participation. The new financing may be as much as 85 billion euros, including contributions from private investors, according to an Austrian Finance Ministry official.

Ten-year German yields gained two basis points to 3.05 percent, the most since June 9. Two-year note yields rose five basis points to 1.66 percent. They have climbed 31 basis points this week.

A manufacturing gauge based on a survey of purchasing managers in the 17-nation euro region fell to 52 from 54.6 in May, London-based Markit Economics said today. That’s the lowest in 18 months. A reading above 50 indicates growth.

Rate Outlook

European Central Bank President Jean-Claude Trichet reiterated yesterday that policy makers are in a state of “strong vigilance” against inflation, indicating borrowing costs may be lifted at their July 7 meeting. The European Central Bank raised its key rate by a quarter point to 1.25 percent in April, the first increase in almost three years.

The ECB will add 76 basis points to its benchmark interest rate in the next 12 months, a Credit Suisse Group AG index based on swaps showed. That compares with 16 basis points predicted by the index on June 22.

Spanish 10-year yields fell six basis points to 5.38 percent. Portuguese two-year notes rose for a fourth day, pushing yields down 22 basis points to 12.97 percent.

The yield difference, or spread, between Spanish 10-year securities and benchmark German bunds narrowed eight basis points to 234 basis points.

The Italian-German spread was three basis points narrower at 183 basis points. It has narrowed 31 basis points this week as Prime Minister Silvio Berlusconi’s cabinet passed deficit-cutting measures to try to balance the budget by 2014.

German government bonds have handed investors a loss of 0.2 percent so far this year, compared with a 2.4 percent gain for U.S. Treasuries and a 1.8 percent advance for U.K. gilts, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

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