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Spanish, Italian Notes Advance on ECB-Driven Demand; Bunds Rise

Spanish Notes Rise on U.S. Growth
The difference between Spain’s two- and 10-year yields widened 67 basis points this week to 175 basis points amid speculation investors bought shorter-maturity notes before the ECB starts its longer-term refinancing operation on Dec. 20. Photographer: Denis Doyle/Bloomberg

Spanish and Italian notes rose, leading gains in euro-area debt, on speculation banks bought the securities to use as collateral when the European Central Bank starts offering three-year loans next week.

Spain’s two-year yields dropped to a four-month low after the nation sold almost double its initial maximum target of securities at an auction yesterday. Italian notes extended a third weekly gain as Prime Minister Mario Monti’s government won a confidence vote. French and Belgian bonds also advanced. German and Dutch two-year yields fell to euro-era records as some investors remained concerned the European debt crisis will worsen, underpinning demand for safer assets.

“The market is in risk-on mode,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. “It’s been a good couple of days from an auction perspective. There’s a temptation on the part of banks to use the opportunity to buy government bonds at the three-year refinancing window at the ECB,” which is boosting Spanish and Italian securities.

Two-year Spanish yields fell 21 basis points, or 0.21 percentage point, to 3.45 percent at 4:16 p.m. London time after dropping to 3.10 percent, the lowest level since Aug. 9. The 2.5 percent note due October 2013 rose 0.365, or 3.65 euros per 1,000-euro ($1,304) face amount, to 98.315. The yields have tumbled 1.22 percentage points this week.

Italian two-year yields slid 21 basis points to 5.34 percent, extending this week’s decline to 62 basis points.

Spread Widens

The difference between Spain’s two- and 10-year yields widened 78 basis points this week to 186 basis points amid speculation investors bought shorter-maturity notes before the ECB starts its longer-term refinancing operation on Dec. 20.

ECB President Mario Draghi announced the plan to offer lenders unlimited funds for three years after the central bank’s policy meeting on Dec. 8.

Spain sold a combined 6.03 billion euros of debt due in January 2016, April 2020 and April 2021 yesterday, compared with an original target of 3.5 billion euros. The government’s cost of borrowing for five years declined.

“The ECB intervention is supporting banks, and that’s positive,” said Peter Schaffrik, head of European rates strategy at RBC Capital Markets in London. “The supply is out of the way, so that’s contributing to an improvement in sentiment.”

Confidence Vote

Italian two-year yields fell as low as 5.01 percent, the least since Nov. 1, as the government survived a confidence vote in the lower house of parliament on a 30 billion-euro package of austerity and growth measures.

A final vote will be held later today before the plan passes to the Senate.

French two-year yields dropped as much as 16 basis points to 0.76 percent, the lowest since Sept. 9, 2010, before being little changed at 0.91 percent. Rates on two-year Belgian debt declined 23 basis points to 2.60 percent. France’s 10-year yield dropped below 3 percent for the first time since Nov. 2.

Bonds of Europe’s most highly-indebted nations also gained after U.S. reports yesterday showed fewer workers filed claims for jobless benefits and manufacturing accelerated this month, adding to signs the world’s largest economy is strengthening. The euro appreciated 0.2 percent to $1.3038.

Euro-area leaders last week outlined a solution including tighter budget rules to contain a surge in Spanish and Italian bond yields that threatened the survival of the common currency.

Moody’s Investors Service said on Dec. 11 the measures agreed at the Dec. 9 summit in Brussels didn’t go far enough.

German Notes

German note yields dropped to a record low on concern the region’s debt crisis is far from being resolved.

The two-year yield declined three basis points to 0.22 percent after falling to a euro-era low of 0.214 percent. Ten-year rates slid as much as seven basis points to 1.87 percent, the least since Nov. 22.

Dutch two-year yields fell three basis points to 0.30 percent after reaching a euro-era low 0.293 percent. Finnish two-year yields dropped four basis points to 0.39 percent.

The decline in yields is “reflecting the fact that investors are comfortable with German, Dutch and Finnish paper relative to the rest of the euro-region,” ING’s Garvey said. “We are still trading in a very menacing environment and at any point sentiment could tip back in to negative territory.”

Ten-year German yields have fallen about a percentage point this year as Europe’s debt crisis intensified. Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, told reporters today the euro region is “on the brink of a recession.”

The ECB cut its benchmark interest rate last week for the second month and lowered its forecast for growth next year to 0.3 percent from 1.3 percent.

German bonds have returned 9 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities gained 4.6 percent, and Italian bonds lost 7 percent, the indexes show.

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