Spanish bonds gained, with two-year yields dropping the most in two weeks, as Prime Minister Mariano Rajoy said his government was committed to cutting the budget deficit and investors bet the country will seek a bailout.
Spain’s securities rose for a second day after Deputy Prime Minister Soraya Saenz de Santamaria told opposition lawmakers they had called for the European Central Bank to buy government debt, setting out the case for an aid request. Spanish bonds are headed for the biggest monthly gain in a year after the ECB said it will act to reduce borrowing costs if countries request assistance. German two-year notes rallied as investors bid for most than the maximum target at a debt sale today.
“Spain’s government has said it’s considering the possibility of a bailout, which is triggering some positivity,” said Gianluca Ziglio, an interest-rate strategist at UBS AG in London. “Spain wants to avoid being told they need to make much stricter commitments than they are planning. The government wants to come up with a plan of its own and use that as a platform to get support.”
Spain’s two-year yield fell 21 basis points, or 0.21 percentage point, to 3.12 percent at 4:04 p.m. London time after dropping as much as 25 basis points, the biggest decline since Sept. 4. The 4.75 percent note due in July 2014 gained 0.36, or 3.0 euros per 1,000-euro ($1,306) face amount, to 102.865.
The 10-year yield declined 19 basis points to 5.71 percent.
Spanish government bonds have returned 4.5 percent this month, according to indexes compiled by Bank of America Merrill Lynch. The securities are set for their biggest gain since August 2011, when they gained 5.3 percent.
“The policy is to reduce the deficit because if we don’t reduce the deficit we aren’t going to be able to finance ourselves,” Rajoy told Parliament today in response to a question from Socialist leader Alfredo Perez Rubalcaba about anti-austerity protests last week.
Saenz said yesterday the nation would consider seeking external aid if the conditions were acceptable.
“The ECB is promoting sovereign-debt purchases in the secondary market, an option that until recently you thought was positive,” she told Socialist lawmakers in Parliament in Madrid today. While Saenz said Rajoy was still analyzing whether to seek help, she set out arguments that would justify a request.
Spain is scheduled to sell as much as 4.5 billion euros of debt due in October 2015 and January 2022 tomorrow.
The auction will probably succeed because “recent policy announcements have created an environment conducive for peripheral bond auctions to go well, at least in the near term,” Citigroup Inc. analysts Nishay Patel in London and Aman Bansal in Mumbai, wrote today in a note to clients.
Issuance near the top of the indicated range would push total supply for this year to about 71 billion euros, or 81 percent of what the government plans to offer in 2012, the analysts wrote.
Spanish 10-year yields have fallen about 30 basis points since Sept. 6, when ECB President Mario Draghi announced details of the central bank’s asset-purchase plan. Activation is dependent on countries asking for help and submitting themselves to conditions set by the ECB. The Spanish benchmark yield climbed to a euro-era record 7.75 percent on July 25.
“The fundamental challenges in Spain remain unchanged,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “Yields are definitely more bearable than where we came from during the summer, but they are still high.”
Germany sold notes due in September 2014 at an average yield of 0.06 percent, compared with zero at the previous auction on Aug. 22. Investors submitted bids for 8.45 billion euros, compared with a maximum target of 5 billion euros.
The two-year yield fell two basis points to 0.06 percent and the 10-year rate dropped three basis points to 1.61 percent.
Germany’s bonds returned 2.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities rose 0.4 percent and Italy’s gained 15 percent.
Volatility on Irish bonds was the highest in euro-area markets today, followed by Spain, according to measures of 10-year or equivalent-maturity debt, the spread between two-year and 10-year securities and credit-default swaps.
Ireland’s nine-year bond yield dropped as much as 25 basis points to 5.01 percent, the least since August 2010.
Yields on Austrian, Finnish and Dutch debt are too close to those of similar-maturity bunds to offer investors an incentive to hold them over their safer German equivalents, according to Tim Haywood, a fund manager at GAM, a subsidiary of GAM Holding AG in London.
Haywood, who manages about $14 billion, said he swapped his holdings in the debt of these countries for that of Germany last month. The maturities are mainly around five years, he said.
The extra yield investors demand to hold Dutch five-year notes over their German equivalent was 18 basis points after shrinking to 15 basis points on Sept. 14, the least since June 2011, according to Bloomberg data based on closing prices. The spread between Austrian and German five-year yields is 34 basis points, while the Finnish-German spread is 19 basis points.