Spain’s government bonds completed their first weekly gain in a month amid optimism Prime Minister Mariano Rajoy will win a compromise with European peers on financial aid to shore up the nation’s banks.
The country’s 10-year yield dropped the most since January after the nation exceeded its maximum target at a debt sale. Spain may request emergency aid as soon as today when euro finance ministers hold a conference call, said a German government official and a European Union aide. German bunds fell for the first week since March as demand for safer assets waned.
“The market is behaving as if a positive response is imminent,” said Mohit Kumar, head of European interest-rate strategy at Deutsche Bank AG in London. “The rally we saw earlier this week reflects the market thinking there is going to be a policy response, and it is well-targeted to the recapitalization of the Spanish banks.”
The Spanish 10-year yield dropped 31 basis points, or 0.31 percentage point this week, to 6.22 percent at 4:57 p.m. London time yesterday, the biggest decline since the period ended Jan. 27. The 5.85 percent bond due in January 2022 gained 2.16, or 21.60 euros per 1,000-euro ($1,247) face amount, to 97.36.
The bonds surged on June 7, driving 10-year yields down by the most in two weeks, after the government sold 2.07 billion euros of debt due in 2014, 2016, and 2022, surpassing its maximum target of 2 billion euros. It auctioned the 10-year bonds at an average yield of 6.044 percent, compared with 5.743 percent at the previous sale on April 19.
“Spain can clearly still borrow in the markets but it must pay high yields for the privilege,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London.
Spanish bonds pared their weekly advance yesterday after Fitch Ratings lowered the nation’s credit grade to within two steps of junk.
Fitch cut Spain by three levels to BBB on June 7, within two steps of non-investment grade, saying the cost of shoring up the nation’s banks may rise to as much as 100 billion euros.
German bunds fell this week as a Chinese interest-rate cut on June 7 damped demand for the euro region’s safest assets.
The German 10-year yield rose 16 basis points to 1.33 percent, the first increase since the five days ending March 16.
The Netherlands will sell as much as 2.5 billion euros of bonds due in 2033 on June 12, while Austria will auction bonds due in 2022 and 2062 the same day. Germany plans to sell five billion euros of 10-year bunds on June 13.
German debt has returned 3.5 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities have lost 2.3 percent, and Italian bonds rose 8.8 percent.
-- Editors: Nicholas Reynolds, Paul Dobson