Spain’s Bonds Defy Supply to Rally Amid Optimism on Greece Aid

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Spain’s government bonds rallied with their Italian counterparts, reversing intraday losses, on optimism that negotiations aimed at securing funding for Greece are progressing.

Ten-year yields in both nations dropped the most in a month even as they sold a total of about 12 billion euros ($13.5 billion) of debt. The Athens Stock Exchange General Index jumped by the most since February as Greece’s Prime Minister Alexis Tsipras pledged to work with “higher intensity” to find a deal with creditors following a meeting with German Chancellor Angela Merkel. German bonds rose as 10-year yields above 1 percent attracted buyers.

“They are living on hope again, and Greece is outperforming on the bonds side,” said Mathias Van Der Jeugt, a fixed-income strategist at KBC Bank NV in Brussels.

Spain’s 10-year bond yield fell 11 basis points, or 0.11 percentage point, to 2.13 percent as of 5:01 p.m. London time, the steepest decline since May 7. The yield reached 2.40 percent on Wednesday, the highest since Oct. 16. The 1.6 percent security due in April 2025 rose 0.94, or 9.40 euros per 1,000-euro face amount, to 95.33.

Italy’s 10-year yield dropped 11 basis points to 2.14 percent, after climbing to 2.42 percent on Wednesday, the highest since Nov. 6.

Greece’s two-year note yield fell 155 basis points to 24.67 percent, after rising to 27.47 percent earlier Thursday.

Greek Aid

The nation has until the end of June to win the release of as much as 7.2 billion euros from its rescue package before the agreement expires. A Marc poll of 1,001 people conducted this week for Alpha TV showed that 50.2 percent of respondents said Greece should accept creditors’ demands, compared with 37.4 percent who said Tsipras should stand firm.

Spain allotted 3.2 billion euros of five-year notes at an average yield of 1.243 percent, almost double the 0.641 percent yield at a previous offering on May 21. For the government, borrowing costs compare favorably with the average 3.20 percent over the past decade.

Italy sold notes due in 2022 at an average yield of 1.76 percent, compared with 1.31 percent in May. That’s still down from 2.29 percent in May 2014.

“There has been some repositioning in the market and we’ve seen higher yields and that seems to attract a little bit of interest,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “Clearly Italy and Spain are also trading a bit on what’s happening in Greece. We’ve been shifting back and forth on whether the market is getting optimistic or pessimistic.”

IMF Departure

Spanish bonds stayed higher even as the International Monetary Fund said that its team negotiating with Greece left Brussels after failing to make progress on a deal. Gerry Rice, a spokesman for the Washington-based lender, cited “major differences” in “most key areas” for the decision.

German bonds rallied even as a U.S. government report showed retail sales increased in May, adding to signs that the recovery in the world’s largest economy is gathering pace.

The yield on Germany’s 10-year bunds, the euro area’s benchmark sovereign securities, fell 10 basis points to 0.88 percent. The yield rose above 1 percent on Wednesday for the first time since September, up from a record-low 0.049 percent reached as recently as April 17.

Treasuries also climbed, pushing 10-year note yields down from an eight-month high reached earlier on Thursday.

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