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Portuguese Bonds Rise Amid Debt-Swap Optimism; Bunds Snap Loss

Portugal’s government securities advanced, with 10-year bonds rising for a third day, amid speculation that a bond-swap plan will pave the way for the nation to return to long-term debt markets.

German 10-year bund yields were within three basis points of the lowest level in four weeks as a report showed euro-area services and manufacturing output dropped in September. Ten-year Italian yields dropped to an eight-day low after Finance Minister Vittorio Grilli told lawmakers the nation’s economic recovery will start in the first months of 2013. Spanish two-year notes declined after Prime Minister Mariano Rajoy said yesterday he has no plans to request a bailout soon.

“Sentiment has improved in the peripheral countries,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The debt swap in Portugal is likely to be beneficial in generating optimism, not just for Portugal but for other peripherals as well because it puts them on the road back to the bond market.”

The yield on Portugal’s bonds maturing in October 2023 dropped 16 basis points, or 0.16 percentage point, to 8.76 percent at 4:40 p.m. London time. The securities rose 0.93, or 9.30 euros per 1,000-euro ($1,291) face amount, to 73.705. The nation’s two-year note yields declined 23 basis points to 4.86 percent.

Portugal Swap

Portugal’s debt agency exchanged securities due in September 2013 for notes maturing in October 2015 as it tried to reduce the nation’s near-term debt burden and regain access to the capital market.

The Lisbon-based IGCP bought 3.76 billion euros of the 2013 securities at a yield of 3.1 percent in exchange for the same face amount of the 2015 notes at a yield of 5.12 percent. Before today’s bond exchange, the 2013 securities had 9.7 billion euros outstanding.

Germany’s 10-year yield was one basis point lower at 1.45 percent, after falling to 1.42 percent on Sept. 28, the least since Sept. 5, according to data compiled by Bloomberg.

“We see German bonds as overvalued unless the 10-year yields get to 1.50 percent or above,” said Credit Agricole’s Chatwell.

Euro-area services and manufacturing output dropped for an eighth month in September. A composite index based on a survey of purchasing managers in both industries fell to 46.1 from 46.3 in August, Markit Economics said. That’s above an initial estimate of 45.9 published on Sept. 20. A reading below 50 indicates contraction.

Retail Sales

German bonds pared gains after a report showed euro-area retail sales unexpectedly increased for a fourth month in August as demand rebounded in Germany, Europe’s largest economy.

Sales in the 17-member euro area rose 0.1 percent from July, when they also gained a revised 0.1 percent, the European Union’s statistics office in Luxembourg said. Economists had forecast a decline of 0.1 percent, according to the median of 17 estimates in a Bloomberg News survey. From a year earlier, sales dropped 1.3 percent.

Italian 10-year yields rose two basis points to 5.05 percent, after reaching 4.97 percent, the lowest level since Sept. 21.

“Only recently there have been signs of greater financial stability that will lead, with inevitable delay, to a better performance of our economy,” Grilli told the joint budget committee of the Chamber of Deputies and the Senate.

Spain’s two-year yield added eight basis points to 3.22 percent, snapping two days of declines.

Spanish Sale

“There’s ongoing speculation about when Spain will ask for a bailout,” said Gianluca Ziglio, an interest-rate strategist at UBS AG in London. “Even though Rajoy said they won’t do it in the short-term, the market is pricing in that they will ask for aid this month.”

Spanish notes declined before the government sells as much as 4 billion euros of notes maturing in 2014, 2015, 2017 tomorrow.

German bunds have returned 3.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities earned 1.6 percent and Portuguese bonds made 44 percent.

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