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Spanish Bonds Advance on Merkel Optimism Over Greece Aid

Spanish 10-year bonds advanced, pushing the yield to the lowest level in almost two weeks, after German Chancellor Angela Merkel said she saw a chance for a deal on aid for Greece as soon as next week.

Spain’s benchmark securities gained for a second day as optimism the Greek crisis will be resolved boosted demand for the debt of so-called peripheral nations. Greece’s 10-year securities rose for a ninth day as German Finance Minister Wolfgang Schaeuble said the Eurogroup united on the idea of a Greek bond buyback, although some “technical questions” remained open. Germany’s 10-year bunds were little changed.

“The market is slightly risk-on, possibly after Merkel’s comments,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “Spain is being dragged with the risk-on feeling, while Greece is benefiting from talk of a buyback.”

Spanish 10-year yields declined seven basis points, or 0.07 percentage point, to 5.71 percent at 4:32 p.m. London time after touching 5.70, the least since Nov. 8. The 5.85 percent bond maturing in January 2022 rose 0.52, or 5.20 euros per 1,000-euro ($1,281) face amount, to 100.93.

European Union finance ministers meeting in Brussels yesterday left the next tranche of Greek aid frozen until another meeting on Nov. 26. They failed to tackle the dual task of steering an extra 32.6 billion euros to the Mediterranean nation through 2016 while finding a way to tame the resulting increase in its debt, already the highest in Europe.

Merkel Comments

The will to keep Greece in Europe shouldn’t detract from the need to carry out necessary reforms, Merkel told the German parliament in Berlin.

Schaeuble said possible solutions include reducing interest payments on its initial bailout loans, suspending payouts through 2020 on Greece’s second rescue package, or having the European Central Bank buy 9 billion euros of the country’s Treasury bills, according to four people who attended the briefing in Brussels.

There is a more than 50 percent chance that voluntary buybacks will be agreed next week at a 5-10 euro-cent premium on the current market price, London-based Nomura International Plc economists Dimitris Drakopoulos and Lefteris Farmakis wrote in a client note today.

“The consensus continues to be that will have some kind of an agreement on Greece,” said Michael Markovich, head of global interest-rates research at Credit Suisse Group AG in Zurich. “We’ve had delays before so I would not overemphasize that. If you look at the market it doesn’t seem to have had a material impact.”

Longest Streak

Greek government bonds maturing in February 2023 extended their streak of gains to the longest since the nation’s debt was restructured in March. The yield dropped 35 basis points to 16.75 percent, leaving the price at 33.69 percent of face value.

Germany sold 4 billion euros of 10-year bunds at an average yield of 1.40 percent, down from 1.56 percent at the previous sale of the securities on Oct. 24. That’s the lowest rate since an auction of 10-year bonds on July 11, which were sold at a record-low yield of 1.31 percent.

The nation’s 10-year yields rose two basis points to 1.44 percent.

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

Ireland, Portugal

The yield on Irish bonds due in October 2020 fell 17 basis points to 4.49 percent. It touched 4.47 percent, the lowest since the securities were first auctioned in January 2010, based on closing prices.

Ireland and Portugal may re-start issuing bonds in 2013 to cover at least their redemption profile, London-based UBS AG strategists Gianluca Ziglio and Pooja Kumra wrote in a client note dated yesterday.

Portugal’s borrowing costs rose as the government sold a combined 2 billion euros of three-, six- and 18-month bills in its last debt auction for this year. The nation sold 1.2 billion euros of securities due in May 2014 at an average yield of 2.99 percent, compared with 2.967 percent at a previous auction of 18-month bills on Sept. 19, the debt management agency said.

Investors bought 500 million euros of six-month bills at 2.169 percent, up from 1.839 percent on Oct. 17, and 300 million euros of three-month securities at 1.936 percent, versus 1.366 percent on Oct. 17.

Portugal last sold bonds at auction in April 2011, while Ireland last issued in September 2010, according to data compiled by Bloomberg.

German bonds returned 3.6 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities gained 18 percent, and Spain’s earned 2.5 percent.

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