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Spanish Bond Gains Push Yields to Record as Bunds Pare Decline

Aug. 21 (Bloomberg) -- Spanish government bonds advanced for a third day, pushing five- and 10-year borrowing costs to record lows, as investors sought higher-yielding alternatives amid speculation benchmark German rates will stay low.

Germany’s bonds were little changed, with 10-year yields below 1 percent, even after minutes of the U.S. Federal Reserve’s July meeting released yesterday showed policy makers raised the possibility of boosting rates sooner than they had anticipated. A report today showed the euro region’s manufacturing and services industries grew this month at a slower pace than economists predicted.

“It’s the same picture as in previous days,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “Bunds are trading around 1 percent and periphery yields are grinding lower. We take this as a sign people aren’t expecting a near-term selloff in bunds.”

Spain’s 10-year yields slipped one basis point, or 0.01 percentage point, to 2.39 percent as of 4:26 p.m. London time after touching 2.371 percent, the lowest since Bloomberg started collecting the data in 1993. The 2.75 percent bond due in October 2024 rose 0.08, or 80 euro cents per 1,000-euro ($1,328) face amount, to 103.19.

The nation’s five-year rate fell to as low as 0.91 percent, while Italian 10-year yields dropped two basis points to 2.58 percent after reaching a record-low 2.561 percent yesterday.

Germany, France

Germany’s 10-year yield was at 0.99 percent after increasing as much as two basis points to 1.01 percent. The rate dropped to a record 0.951 percent on Aug. 15. Similar-maturity French bonds yielded 1.39 percent.

Investors are increasing their holdings of peripheral euro-area debt as the low yields offered by those of Germany are unattractive and weak economic data boost the odds of further stimulus from the European Central Bank, according to Jens Peter Soerensen, chief analyst at Danske Bank A/S in Copenhagen.

With yields on German debt out to five years close to zero, investors have been “crowded out” into higher-yielding euro-region securities, Soerensen said in an interview.

Germany’s two-year note yielded 0.007 percent. The rate dropped to minus 0.014 percent on Aug. 19, the least since May 2013. A negative yield means investors who buy a security and hold it until it matures will receive less than they paid to purchase it. The nation’s five-year debt yielded 0.23 percent.

Markit Economics said its composite Purchasing Managers Index for the euro region fell to 52.8, from 53.8 in July. The median estimate of economists in a Bloomberg News survey was for a decline to 53.4. A reading above 50 indicates expansion.

Spreads Narrow

The yield difference, or spread, between Spanish and German 10-year bonds narrowed one basis point to 1.40 percentage points. The equivalent Italian-German spread tightened two basis points to 1.59 percentage point.

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

Finland’s 10-year yield was little changed at 1.17 percent.

Germany’s securities returned 6.8 percent this year through yesterday, Bloomberg World Bond Indexes show. Spain’s earned 12 percent and Italy’s gained 11 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Keith Jenkins, Lukanyo Mnyanda

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