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European Bonds Rally From Ireland to Greece Amid Growth Optimism

A Spanish National Flag Flies Above the Bank of Spain
A gold finial stands above the Bank of Spain, as a Spanish national flag flies above in Madrid. Photographer: Antonio Heredia/Bloomberg

European government bonds jumped, with yields from Ireland to Greece dropping to the lowest since at least 2010, as signs of the region’s economy is recovering helped spark a surge in demand for the securities.

Spain’s 10-year yields dropped to the lowest since 2009 and Italy’s slipped to the least since May as German reports showed unemployment dropped for the first time in five months in December and retail sales increased in November. Ireland’s 10-year rates declined to the lowest since 2006 as demand at a bond sale through banks boosted optimism the nation is making a successful return to the sovereign debt market after exiting a bailout last month.

“Confidence about the euro region has improved and data suggests the recovery is gaining some momentum,” said Luca Jellinek, head of European rates strategy at Credit Agricole Corporate & Investment Bank in London. “It is an environment that can potentially reduce fiscal stress. That is supportive of demand for peripheral bonds,” he said, referring to the region’s higher-yielding securities.

Spain’s 10-year yield fell 10 basis points, or 0.10 percentage point, to 3.80 percent at 4:52 p.m. London time after declining to 3.79 percent, the lowest since December 2009. The 4.4 percent bond due in October 2023 rose 0.835, or 8.35 euros per 1,000-euro ($1,362) face amount, to 104.79.

The extra yield of the securities over German bunds shrank eight basis points to 192 basis points after reaching 190 basis points, the narrowest since April 2011.

Greek bonds advanced, with the 10-year rate falling as much as 40 basis points to 7.80 percent, the lowest level since June 2010.

Italian Bonds

Italy’s 10-year yield dropped seven basis points to 3.87 percent after sliding to 3.86 percent, the least since May 20. The spread versus bunds shrank to as little as 197 basis points, the least since July 2011.

Ireland raised 3.75 billion euros selling a 10-year bond after receiving orders of more than 14 billion euros, according to people familiar with the matter.

The National Treasury Management Agency, based in Dublin, will sell the securities due in 2024 to yield 140 basis more than the mid-swap rate, narrowing from an initial goal of about 150 basis points, said the people, who weren’t authorized to speak about it so asked not to be named. The agency had planned to sell at least 3 billion euros, another person familiar said.

‘Confidence Returns’

“Strong demand for the Irish bond sale suggests confidence returns to Ireland and perhaps other peripheral countries as well,” said Michael Leister, a senior fixed-income strategist at Commerzbank AG in London. “Strong secondary market performance also points to a similar picture. This will bode well for Portugal, which is likely to follow with a new bond this month.”

Ireland’s 10-year yield fell seven basis points to 3.28 percent after dropping to 3.25 percent, the lowest since January 2006. The spread over bunds shrank to as little as 135 basis points, the narrowest since April 2010.

Volatility on Irish bonds was the highest in euro-area markets today, followed by those of Portugal and France, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.

Portugal’s two-year yield dropped as much as 35 basis points to 2.16 percent, the lowest since May 2010.

Germany’s benchmark 10-year bund yield dropped two basis points to 1.89 percent after rising to 1.97 percent on Jan. 2, the most since Sept. 23.

Unemployment Falls

The number of people unemployed in Germany fell by a seasonally-adjusted 15,000 to 2.965 million, after climbing a revised 9,000 in November, the Federal Labor Agency said. Retail sales rose 1.5 percent, after sliding 0.8 percent in October, the central bank said.

Euro-area inflation slowed to 0.8 percent in December from 0.9 percent the previous month, the European Union’s statistics office said. It has been below the European Central Bank’s 2 percent ceiling for 11 months. The ECB, which cut its benchmark interest rate to a record low of 0.25 percent in November, will leave its main refinancing rate unchanged on Thursday, according to a separate Bloomberg survey.

Germany’s 10-year break-even rate, a measure of inflation expectations derived from the yield difference between conventional bonds and index-linked securities, was little changed at 1.52 percentage points. France’s 10-year break-even rate was at 1.69 percentage points, compared with 1.94 percentage points a year ago.

Austria’s debt agency sold 10-year bonds at an average yield of 2.17 percent, compared with 1.77 percent at a previous auction on Dec. 10. It also auctioned 30-year securities at an average yield of 2.98 percent, versus 3.01 percent in September.

Spanish securities returned 11 percent in the past year through yesterday, according to Bloomberg World Bond Indexes. Italy’s earned 7.1 percent, while German bonds lost 0.5 percent, the worst performer of 15 euro-area sovereign-debt markets tracked by the indexes.

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