Spanish Bonds Drop as Costs Climb at Auction Before ECB Decision

Spanish bonds led declines among Europe’s most indebted nations as borrowing costs rose at a 10-year auction before a European Central Bank meeting that may result in the first cut in interest rates this year.

Spain’s 10-year yield jumped to more than 6.5 percent for the first time in almost a week amid concern the ECB will refrain from announcing additional measures to calm markets. Policy makers will reduce the refinancing rate to a record-low 0.75 percent from 1 percent today, according to the median prediction of 64 economists in a Bloomberg News survey. Irish notes due in January 2014 fell as the country returned to the financial markets for the first time since its 2010 bailout.

“The market has pretty much priced in a 25 basis-point cut today, and people are guessing what more will the ECB announce,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London. “If you have a quarter-point move and nothing else from the ECB that will be a big disappointment, and a negative factor for peripheral bonds. There is general concern about demand for Spanish debt.”

Spain’s 10-year bond yield increased 22 basis points, or 0.22 percentage point, to 6.63 percent at 11:56 a.m. London time, rising above 6.5 percent for the first time since June 29. The 5.85 percent security due in January 2022 fell 1.505 or 15.05 euros per 1,000 euro ($1,251) face amount, to 94.535. Italy’s 10-year yield rose 10 basis points to 5.87 percent.

Spain sold its 10-year benchmark bond at an average yield of 6.43 percent, compared with 6.044 percent when the securities were last auctioned on June 7. The nation also sold debt maturing in July 2015 and October 2016.

Irish Return

Demand for the 10-year bonds was 3.18 times the amount sold, compared with 3.29 at the June auction. Today’s offerings were the first since European Union leaders agreed at a summit on June 29 to make it easier for the country to access aid.

Ireland’s two-year note yield climbed four basis points to 4.87 percent, after dropping 18 basis points yesterday. The yield on the country’s 5 percent security due in October 2020 increased four basis points to 6.30 percent.

Ireland sold 500 million euros of treasury bills at an average yield of 1.8 percent, attracting bids equivalent to 2.8 times the available amount, the National Treasury Management Agency in Dublin said today.

German bunds were little changed after touching a more than two-week low, as a report showed factory orders unexpectedly rebounded in May.

The 10-year yield was at 1.46 percent, after slipping earlier to 1.44 percent, the least since June 19.

Spanish Volatility

Orders, adjusted for seasonal swings and inflation, rose 0.6 percent from April, when they declined a revised 1.4 percent, the Economy Ministry in Berlin said today. Analysts forecast orders would hold steady, according to the median of 36 estimates in a Bloomberg News survey. From a year earlier, orders fell 5.4 percent when adjusted for work days.

“We won’t see any pressure on the bund market because of the fact we expect the ECB to lower rates,” said Ralf Umlauf, head of floor research at Landesbank Hessen-Thueringen in Frankfurt.

Volatility on Spanish government debt was the highest in the euro area today, followed by Italy, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit default swaps.

German bonds returned 2.7 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 3.6 percent.

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