Spanish and Italian government bonds rallied after a report showed the euro-area economy emerged from a record-long recession in the second quarter, spurring demand for the region’s higher-yielding assets.
Spain’s 10-year yields dropped the most in four weeks to the lowest level since May as gross domestic product also surpassed analysts forecasts in Germany and France, adding to signs the region’s debt crisis is easing. Portugal’s 10-year bonds advanced for a third day. German bunds were little changed as borrowing costs climbed to the highest level since February 2012 as the nation sold 3.23 billion euros ($4.28 billion) of 10-year securities.
“The market has been underpinned by the recent better data,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. “The trend has been pretty robust. We’ve seen some decent buying of periphery,” he said, referring to the securities of Europe’s high debt and deficit nations.
Spain’s 10-year yield fell seven basis points, or 0.07 percentage point, to 4.42 percent at 4:42 p.m. London time after declining to 4.41 percent, the lowest since May 31. The 4.4 percent bond maturing in October 2023 rose 0.595, or 5.95 euros per 1,000-euro face amount, to 99.855.
The Italian 10-year yield dropped five basis points to 4.18 percent after dropping to 4.15 percent yesterday, the least since June 6. Similar-maturity Portuguese yields fell three basis points to 6.50 percent.
Euro-area GDP expanded 0.3 percent in the three months through June after shrinking 0.3 percent in the previous quarter, the European Union’s statistics office said. Germany GDP increased 0.7 percent, more than the 0.6 percent gain forecast by economists, while France’s expanded 0.5 percent after two quarters of contraction. Still, at least four of the 17 nations remain in recession, including Spain and Italy.
The additional yield investors demand to hold Spanish 10-year bonds instead of similar-maturity German bunds fell eight basis points to 260 basis points after narrowing to 259, the least since July 2011.
Italy’s yield spread over bunds contracted five basis points to 237 basis points after reaching 235, also the narrowest since July 2011.
The spread may shrink to as little as 200 basis points by year-end, ING’s Garvey said. It was as wide at 575 basis points in November 2011.
“Broader investor sentiment is slightly more constructive,” said Mark Dowding, who helps oversee $56 billion at BlueBay Asset Management LLP in London. “Some economic data in Europe has been pointing toward some green shoots of recovery. If we do see an improving outlook for the euro area economy, German bond yields will continue to rise.”
Germany’s 10-year bund yielded 1.81 percent after climbing to 1.84 percent, the most since June 24.
Germany allotted 10-year bunds at an average yield of 1.80 percent, the highest at an auction since Feb. 29, 2012. The nation last sold 10-year securities on July 17 at 1.57 percent. That compares with a record-low 1.28 percent on April 17.
“The auction was decently bid,” Annalisa Piazza, an analyst at Newedge Group in London, wrote in a note. “But not exceptionally solid, given the sell-off of the 10-year. A new 10-year bund will be launched in September.”
Germany’s benchmark yield dropped to a record 1.127 percent last year as concern the euro-region would splinter boosted demand for the top-rated securities. Yields have climbed since European Central Bank President Mario Draghi pledged to do “whatever it takes” to preserve the shared currency, and policy makers cut interest rates to a record to boost growth.
“We are going the way of higher yields for Germany,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “We’ve had pretty good data from Europe, there have been no negative surprises. We are getting back to the top of the range. Once we get to 1.85 percent there will be quite a few buyers.”
Volatility on Greek bonds was the highest in euro-area markets today followed by those of the Netherlands and Belgium, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
Spanish securities returned 7.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italy earned 4.1 percent, while German bonds lost 2.1 percent.