Spanish Bonds Rise as Bund Spread Eases Amid Firewall Optimism

Spanish government bonds advanced, reducing yield spreads over similar-maturity German bunds, as euro-area ministers prepared a deal to bolster the region’s financial firewall and protect indebted nations.

Germany’s bonds fell for the first time in five days after an index of business confidence unexpectedly rose to an eight-month high in March and the nation sold 2.7 billion euros ($3.6 billion) of 12-month bills. France’s two-year note yields dropped to a record low. It sold 6.9 billion euros of 84-, 161-day and 343-day bills.

Yields “are slightly lower because we had positive news, a few reports out there that Germany will accept the firewall,” said Achilleas Georgolopoulos, a fixed-income strategist at Lloyds Bank Corporate Markets in London.

Spanish 10-year bonds advanced for a second day, pushing the yield down four basis points, or 0.04 percentage point, to 5.33 percent at 4:20 p.m. London time. The 5.85 percent security due January 2022 rose 0.34, or 3.40 euros per 1,000-euro face amount, to 103.9.

The extra yield investors demand to hold the securities over benchmark 10-year German bunds fell 12 basis points to 338 basis points. The Italian-German yield spread narrowed nine basis points to 308.

Bailout Funds

Euro-area leaders have established two bailout funds, the temporary European Financial Stability Facility and the permanent 500 billion-euro European Stability Mechanism, which is scheduled to begin operations this year. German Chancellor Angela Merkel today signaled she is prepared to allow an increase in the debt-crisis firewall, saying Germany could let the funds run in parallel.

European Union finance ministers meet in Copenhagen starting on March 30.

The German 10-year yield surged eight basis points to 1.95 percent after dropping 19 basis points last week, the most since the five days ended Dec. 16.

The Munich-based Ifo institute said today its business climate index, based on a survey of 7,000 executives, increased to 109.8 from a revised 109.7 in February. Economists forecast it would remain unchanged at the initial February reading of 109.6, according to the median of 44 estimates in a Bloomberg News survey.

The French two-year note yield was at 0.45 percent, having earlier slid to 0.435 percent, the least since Bloomberg began collecting the data in 1990.

Spanish elections

Spanish bonds were among the majority of euro-area securities that outperformed bunds even after the nation’s ruling People’s Party failed to dislodge the Socialists in a vote in the region of Andalusia, undermining Prime Minister Mariano Rajoy as he seeks to cut the deficit.

Only Dutch and Greek government debt underperformed bunds, with the Netherlands’s 10-year yield climbing eight basis points to 2.53 percent. Volatility on Dutch bonds was the highest in euro-area markets followed by Finland and Germany, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. The change in the 10-year yield was 8.2 times the 90-day average.

Greek government bonds due February 2023 dropped, pushing the yield on the securities up 14 basis points to 20.24 percent. The price fell to 24.675 percent of face value, the lowest since the bonds were issued, according to closing prices.

Greece’s 30-year bonds advanced, with the yield dropping 51 basis points to 17.40 percent. The nation said on March 23 it would extend the deadline for holders of foreign-law securities to participate in its debt swap.

Bund Futures

German bunds have lost 0.1 percent over the past year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French bonds have gained 1.9 percent and Spanish securities have risen 1 percent, the indexes show.

German 10-year bund futures may fall toward a three-month low, Societe Generale SA said, citing trading patterns.

“Last week’s bounce on the 135.22-27 support area probably aimed to consolidate the impressive decline that started at 139.06 in mid-March,” Ciaran O’Hagan, head of euro-area rate strategy in Paris, wrote in an e-mailed report. “In that case, the 137.67-75 gap should force the bund to return to 135.22-27, with a first step at 136.63.”

The 136.63 level is the first support for the securities, O’Hagan wrote, referring to an area on a graph where technical analysts anticipate buy orders to be clustered.

The bund contract expiring in June slipped to 136.72 today.

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