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Spanish Bonds Surge With Italy as Moody’s Rating Spurs Optimism

Spain Yields Plunge to 6-Month Low on Moody’s Rating Above Junk
Pedestrians pass a Spanish national flag on Cibeles square in Madrid. Photographer: Angel Navarrete/Bloomberg

Spain’s government bonds advanced, pushing 10-year borrowing costs to the lowest in more than six months, after Moody’s Investors Service said it would keep the nation’s credit rating at investment grade.

Italian and Portuguese securities also rallied amid optimism the euro region is making progress to contain the debt crisis. Moody’s cited a reduction in the risk of Spain losing market access because of the European Central Bank’s willingness to buy the nation’s bonds. German 10-year bunds declined for a third day while two-year notes slipped after the nation sold 4.19 billion euros ($5.5 billion) of the securities.

Moody’s decision is “obviously quite a positive development, as is reflected in this morning’s price moves,” said Brian Barry, an analyst at Investec Bank Plc in London. “I would expect Spanish and Italian debt to trade better today, and for the positive tone to spread across to other risk assets, with safe havens to come back a bit.”

Spain’s 10-year bond yield fell 34 basis points, or 0.34 percentage point, to 5.46 percent as of 4:42 p.m. London time, the lowest since April 4. The 5.85 percent security due in January 2022 rose 2.44, or 24.40 euros per 1,000-euro face amount, to 102.725. The nation’s two-year yield dropped 35 basis points to 2.78 percent.

Moody’s Review

Moody’s maintained the nation’s credit grade at Baa3, one step above junk, and assigned a negative outlook on the sovereign debt as it concluded the review for a possible further downgrade that it had initiated in June, the New York-based company said in a statement yesterday.

“This is unambiguously good news for risk appetite, and quite downbeat for bunds,” Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris, wrote in an e-mailed note. “Spanish yields will push lower now over the coming days even if official bond buying is some way off.”

Spanish bond yields have dropped more than two percentage points from their record high of 7.75 percent reached July 25, the day before ECB President Mario Draghi said that policy makers would do “whatever it takes” to save the currency bloc.

While the ECB announced an unlimited bond-purchase program on Sept. 6 to stem financial-market turmoil, Spanish Prime Minister Mariano Rajoy hasn’t requested aid, a condition the central bank insists on.

Default Swaps

The cost of insuring Spain’s debt against default fell, set for the lowest close since July 5, 2011. Credit-default swaps tied to Spain’s government bonds fell 39 basis points to 279 basis points. The contracts have dropped for the past four days. Swaps on Italy declined 27 basis points to 243, also the lowest since July last year, according to prices compiled by Bloomberg.

Volatility on German bonds was the highest in euro-area markets today, followed by Finland and the Netherlands, according to measures of 10-year or equivalent-maturity debt, the spread between two-year and 10-year securities and credit-default swaps.

German 10-year bund yields climbed nine basis points to 1.64 percent, the highest level since Sept. 19. The two-year notes added two basis points to 0.1 percent.

Germany got bids for 8.47 billion euros of two-year notes compared to a 5 billion-euro target at today’s auction, the Bundesbank said in an e-mailed statement.

The nation sold the securities at an average yield of 0.07 percent, it said. That’s the highest since a sale on June 20 and compares with a record-low auction average yield of minus 0.06 percent on July 18.

Precautionary Credit

Two German lawmakers said yesterday the nation was open to Spain seeking a precautionary credit line from Europe’s rescue fund. The comments by Michael Meister, a deputy caucus leader of Chancellor Angela Merkel’s Christian Democratic bloc, and Norbert Barthle, the party’s budget spokesman, signaled a reversal of Finance Minister Wolfgang Schaeuble’s public position.

European Union leaders are scheduled to gather for a two-day summit in Brussels starting tomorrow.

Finnish Prime Minister Jyrki Katainen said he doesn’t see Spain needing a sovereign bailout, unlike Ireland and Portugal.

“If Spain decides to ask for some sort of bailout then Europe should be ready to act and I’m sure they will not need a full program like Ireland or Portugal and instead they might need some sort of a precautionary program,” Katainen said in an interview in Bucharest today. “The main focus now should be that Spain remains in the market and gets funding.”

Spanish Auction

The Iberian nation plans to sell as much as 4.5 billion euros of bonds maturing between 2015 and 2022 tomorrow. It last auctioned the securities due in 2022 on Sept. 20 at an average yield of 5.67 percent.

France is scheduled to sell as much as 8 billion euros of notes maturing between two- and five-years tomorrow, and up to 2.5 billion euros of inflation-linked bonds due in 2021.

Italy’s two-year notes rose, pushing the yield below 2 percent for the first time since March 16. The rate slid as much as 14 basis points to 1.98 percent, while the nation’s 10-year bond yield dropped 17 basis points to 4.77 percent.

Portugal’s 10-year yield fell below 8 percent for the first time since March 29, 2011, slipping as much as 33 basis points to 7.71 percent, the lowest since March 24, 2011.

German bonds returned 2.8 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities gained 1.9 percent.

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