Spanish government bonds rose for a second week, pushing 10-year yields to a seven-year low, as evidence that the euro-area recovery is gaining momentum boosted demand for the region’s higher-yielding debt.
“The periphery has had an incredible start to the year,” said Oliver Eichmann, Frankfurt-based head of portfolio management for the euro area at DWS Investments, a unit of Deutsche Asset & Wealth Management, which oversees about $1.2 trillion. “There has been massive spread tightening. We think this rally might continue for a while.”
Rates on Spanish two- and five-year notes dropped to records as European Central Bank President Mario Draghi strengthened a pledge to keep interest rates low for an extended period. The additional yield investors get for holding Portugal’s 10-year securities instead of Germany’s slid to the least in three years. Yields on similar-maturity Irish bonds fell to the lowest since 2006 as the nation returned to debt markets after exiting its international bailout last month.
Spain’s 10-year yield fell six basis points, or 0.06 percentage point, this week to 3.81 percent at 5 p.m. London time yesterday. It slid to 3.67 percent on Jan. 9, the lowest since September 2006. The 4.4 percent security due in October 2023 rose 0.495, or 4.95 euros per 1,000-euro ($1,366) face amount, to 104.705.
The rate on Spanish two-year notes dropped to 0.953 percent on Jan. 9 and that on five-year notes slid to 2.213 percent, the least since Bloomberg started compiling the data in 1993.
Germany’s 10-year bund yield slid 10 basis points to 1.84 percent, while Portugal’s 10-year rate dropped 28 basis points to 5.37 percent. The yield spread narrowed to 336 basis points on Jan. 8, the least since December 2010.
Europe’s higher-yielding nations outperformed Germany in the past year, according to Bloomberg World Bond Indexes, as confidence in the economic recovery buoyed demand for their assets. Germany’s debt lost 1 percent through Jan. 9, the worst performer in the euro area. Greek bonds gained 47 percent, while Spanish and Portuguese securities both returned 12 percent.
Euro-area retail sales increased 1.4 percent in November, higher than the 0.1 percent gain predicted by economists surveyed by Bloomberg before the Jan. 8 release by the European Union’s statistics office in Luxembourg.
“The Governing Council strongly emphasizes that it will maintain an accommodative stance of monetary policy for as long as necessary,” Draghi told reporters in Frankfurt on Jan. 9 after the ECB kept its key rate at a record-low of 0.25 percent. “It’s still premature to declare any victory.”
Ireland’s 10-year yield plunged to 3.25 percent on Jan. 7, the lowest since January 2006, as the nation raised 3.75 billion euros selling a 10-year bond. Investors placed bids of more than 14 billion euros, the National Treasury Management Agency in Dublin said in a statement.
Spain auctioned notes maturing in April 2019 at an average yield of 2.382 percent on Jan. 9, the least on record for a five-year note. Portugal sold bonds via banks on the same day, its first sale of coupon-bearing debt since May.
Italy is scheduled to sell as much as 8.25 billion euros of securities due in 2016, 2021 and 2028 on Jan. 13. Spain will offer 2017, 2026 and 2028 debt on Jan. 16. Germany and the Netherlands will also auction notes and bonds next week.