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Spanish Bonds Gain as Debt Sale Beats Target; Bunds Fall

Spanish bonds surged, driving 10-year yields down by the most in more than two weeks, after the government beat its maximum target at a debt sale, easing concern the nation may be forced to seek international aid.

Yields on Spain’s two- and five-year securities tumbled by at least 30 basis points and 10-year bonds extended its longest rally since February after Chancellor Angela Merkel said Germany is ready to back the use of existing euro-area instruments to help stabilize the 17-nation currency bloc. French bonds slid after an auction of 7.8 billion euros ($9.8 billion) of debt. German, Austrian, Belgian and Dutch bonds fell as a Chinese interest-rate cut damped demand for the region’s safest assets.

“There was a big move downward in Spanish yields going into the auction, which seemed to have been driven by the hope that there is shortly to be joint action by several of the major central banks,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “Spain can clearly still borrow in the markets but it must pay high yields for the privilege.”

Spain’s 10-year yield tumbled 19 basis points, or 0.19 percentage point, to 6.09 percent at 5:02 p.m. London time. The 5.85 percent securities due January 2022 climbed 1.360, or 13.60 euros per 1,000-euro face amount, to 98.265. The decline was the most since May 22, when the rate slid 20 basis points. The six-day rally is the longest since the period ended Feb. 27.

Spanish Auction

The two-year yield sank 31 basis points to 4.23 percent, with the five-year rate 30 basis points lower at 5.35 percent. Yields on 10-year German bunds, the euro area’s benchmark government securities, rose five basis points to 1.38 percent.

Spain sold 2.07 billion euros of securities, the central bank said, surpassing the maximum target of 2 billion euros. Investors bought 611 million euros of benchmark 10-year bonds at an average yield of 6.044 percent, up from 5.743 percent at the previous auction on April 19.

The results were “pretty decent overall and the market appears eminently comfortable with the outcome,” said John Davies, a fixed-income strategist at WestLB AG in London. “A tad above the top end of the target volume range obviously looks good, but I think the more encouraging factor was that the 2022 bond came at 6.04 percent, so safely below levels prevailing in the secondary market.”

Spain’s 30-year bond yield declined 16 basis points to 6.27 percent, falling for the sixth consecutive day.

Investors are “sensing” a resolution for Spain as that nation tries to shore up its lenders, said Andrew Bosomworth, a money manager at Pacific Investment Management Co., manager of the world’s biggest bond fund.

French Bonds

Market participants “think a solution is on the horizon for Spain,” Bosomworth said in a radio interview on “Bloomberg - The First Word” with Ken Prewitt.

France’s 10-year bonds dropped for a fourth day as the nation auctioned 3.48 billion euros of the securities at an average yield of 2.46 percent, lower than the 2.96 percent in the prior sale on May 3.

The country also sold 685 million euros in 50-year bonds for the first time since 2010.

The French 10-year yield advanced 16 basis points to 2.57 percent after falling to a record 2.071 percent on June 1. The two-year yield increased seven basis points to 0.52 percent, while the rate on the April 2060 bond jumped 17 basis points to 3.37 percent.

German bunds declined for a second day after China cut interest rates for the first time since 2008, stepping up efforts to combat a deepening economic slowdown.

China Cuts

The People’s Bank of China said the one-year deposit rate will drop to 3.25 percent from 3.5 percent effective tomorrow.

“There’s speculation that there may be some coordinated policy response from central banks, and that’s benefiting Spain and weighing on bunds and other semi-core markets,” Rabobank’s Graham-Taylor said.

The German 10-year yield earlier climbed to 1.42 percent, the highest since May 25. The Stoxx Europe 600 Index of shares gained 1.1 percent.

Austrian 10-year yields climbed 15 basis points to 2.24 percent. Similar-maturity Belgian rates jumped 15 basis points to 3.02 percent, while the yield on 10-year Dutch bonds rose eight basis points to 1.84 percent.

Sweden’s bonds slumped after the financial regulator removed a key incentive for life insurers and pension funds to buy the securities as yields tumbled to a record low. The 10-year yield surged 32 basis points to 1.46 percent. Norway’s similar-maturity yield rose 14 basis points to 1.90 percent.

Swedish Volatility

Volatility on Swedish government bonds was the highest in developed markets today, followed by Austria and Belgium, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

U.K. gilts fell after the Bank of England kept its asset-purchase program on hold at 325 billion pounds. Policy makers also kept the benchmark interest rate at a record-low 0.5 percent. The 10-year gilt yield climbed six basis points to 1.72 percent.

Spanish securities have lost 3.5 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French debt returned 5.9 percent, with German bonds gaining 3.8 percent.

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