Spanish Bonds Gain on Bailout Speculation as Greece Sells Bills

Spain’s bonds rose on speculation the nation is moving closer to asking European policy makers to buy its debt after Prime Minister Mariano Rajoy repeated he will act in the best interests of his country.

The bonds along with Italian debt also climbed after Greece raised more than its maximum target at an auction of bills. Rajoy said he won’t make a decision on whether to seek support from the European Central Bank and a rescue fund until he has more details about how the program would work. German bunds fell for a second day after a report showed gross domestic product in Europe’s largest economy slowed less than forecast in the three months through June.

“There’s talk in the market about a bailout request from Spain and that’s probably why yields fell,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London. “It’s far from being a done deal. But market sentiment seems to be that another bailout is a matter of when and not if.”

The yield on 10-year Spanish bonds dropped 10 basis points to 6.75 percent at 4:49 p.m. London time. The 5.85 percent security due January 2022 jumped 0.635, or 6.35 euros per 1,000-euro ($1,233) face amount, to 93.84. The rate rose to a euro-era high of 7.75 percent on July 25.

The extra yield investors demand for holding the securities instead of benchmark German debt dropped 17 basis points to 527 basis points, or 5.27 percentage points. Two-year note yields fell six basis points to 4.21 percent.

Italian 10-year bond yields declined seven basis points to 5.83 percent, after rising to 5.95 percent.

Spanish Lenders

A report today showed Spanish lenders’ net borrowings from the ECB rose to a record 376 billion euros in July. Rajoy said on Aug. 3 he’ll need to analyze the details of the ECB’s plan to bring down borrowing costs before deciding whether to request more aid as he waits for the first installment of a 100 billion-euro bank bailout.

German GDP rose 0.3 percent from the first quarter, when it gained 0.5 percent, the Federal Statistics Office in Wiesbaden said today. Analysts predicted a 0.2 percent increase, according to the median of 40 estimates in a Bloomberg News survey. The euro-area economy shrank 0.2 percent, another report showed.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict German economic developments six months in advance, declined to minus 25.5 in August from minus 19.6 in July. Economists forecast a gain to minus 19.3, according to the median of 28 estimates in a Bloomberg News survey.

‘Mixed’ Data

“Economic reports today are mixed for Germany, but overall they still show a picture of the two-speed economy in the euro zone,” said Christoph Rieger, the head of interest-rate strategy at Commerzbank AG in Frankfurt. “Yields are probably underpinned today by the GDP data, but they are most likely to stay range-bound in the near term.”

The yield on 10-year German bunds rose seven basis points to 1.47 percent, while two-year note yields increased one basis point to minus 0.036 percent.

Spanish and Italian bonds also outperformed German debt as the Athens-based Public Debt Management Agency said Greece sold 4.06 billion euros of three-month bills, exceeding its 3.125 billion-euro target.

Treasury bill sales are the only source of private finance Greece relies on after two rescue packages. The country won the second package in March, after private creditors wrote down about 100 billion euros of their bond holdings.

Bill Sale

“The Greek bill sale today provided some support for Italian and Spanish bonds,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets in Edinburgh. “Any improvement in risk sentiment is going to be limited as there’s still a lot of uncertainty ahead for Greece in terms of further help that it needs.”

Volatility on Finnish bonds was the highest in developed markets today, followed by Germany and the Netherlands, according to measures of 10-year debt, the spread between two-year and 10-year securities and credit-default swaps.

German bonds returned 3.4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 4.5 percent, while Italy’s debt earned 9.3 percent and French bonds made 8.2 percent, the indexes showed.

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