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Spanish Bonds Advance on Debt Sale; German Bunds Slide After ECB

Spain’s bonds advanced for a second week, pushing two-year yields to the lowest level since October 2010, as the country sold more securities than planned at its first debt auction this year.

Germany’s 10-year bund yields increased for a second week as the European Central Bank refrained from cutting interest rates on Jan. 10 and President Mario Draghi said the euro-area economy should gradually recover this year, damping demand for the region’s safest assets. Irish securities rose after the country sold five-year debt through banks in a step to become the first euro country to exit a bailout program.

“The market has been more upbeat about the euro region and that benefits peripheral assets like Spanish debt,” said Padhraic Garvey, the head of developed-market debt strategy at ING Bank NV in Amsterdam. “We expect this to continue in the first half of the year. There’s a growing market view along the line that there’s enough ammunition on the table to solve any immediate problem the euro zone might have.”

Spanish two-year note yields slid 30 basis points, or 0.3 percentage point, this week to 2.13 percent as of 5 p.m. in London yesterday, after falling to 2.08 percent on Jan. 10, the lowest since Oct. 28, 2010. The 3.3 percent note due in October 2014 gained 0.51, or 5.10 euros per 1,000-euro ($1,335) face amount, to 102.025.

The 10-year yield dropped 17 basis points to 4.89 percent. The rate fell as low as 4.84 percent yesterday, the least since March 1.

Spanish Auction

Spain sold a combined 5.8 billion euros of securities on Jan. 10, exceeding its maximum target of 5 billion euros. It allotted 3.4 billion euros of notes due in March 2015, which include collective-action clauses that limit investors’ rights to oppose writedowns, at an average yield of 2.476 percent.

German bonds fell as the ECB kept the main refinancing rate at a record low of 0.75 percent a month after calls for a cut from some of its Governing Council. Draghi said the decision was “unanimous.”

Germany’s 10-year bund yield added five basis points this week to 1.58 percent. It climbed to 1.61 percent yesterday, the highest since Oct. 25.

Italian and Irish bonds also rose this week as debt sales suggested investors’ confidence in the way leaders and policy makers handled the euro-region crisis has improved.

Yields Fall

Italy’s two-year yield dropped 32 basis points from Jan. 4 to 1.36 percent as borrowing costs fell at an auction yesterday. The country sold 3.5 billion euros of notes maturing in December 2015 at an average yield of 1.85 percent, down from 2.50 percent at the previous sale last month.

Ireland received orders for about 7 billion euros for its notes due in October 2017 compared with the 2.5 billion euros the Dublin-based National Treasury Management Agency sold at 3.32 percent on Jan. 8. Prime Minister Enda Kenny said the sale was a success. The country received a bailout in 2010 as the state and its banks were shut out of capital markets.

The Irish five-year yield dropped eight basis points this week to 3.11 percent.

“We are now back in a normal situation from a financial viewpoint, but we are not at all seeing an early and strong recovery,” Draghi said at a press conference in Frankfurt.

Luxembourg Prime Minister Jean-Claude Juncker, who leads euro-area finance ministers, echoed that by saying, “the worst is over, but what we still have to do is difficult.”

Spanish bonds returned 2.3 percent this year through Jan. 10, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities gained 2.1 percent, while German bunds lost 1.5 percent.

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