Spanish Bonds Advance as Outlook Improves; German Notes Decline
Spain’s government bonds advanced, pushing five-year yields to the lowest level since 2005, amid optimism the economic and fiscal outlook for the euro-region’s higher-debt nations is improving.
The yield difference between Spanish 10-year bonds and German bunds narrowed to the least in more than two years as investors purchased higher-yielding securities before the end of the year. Italian bonds rose as the government in Rome held a buy-back auction, reducing its financing needs for 2014 and 2015. Germany’s two-year notes posted a second weekly decline as investors weighed the prospects of the Federal Reserve cutting asset purchases as soon as this month.
“Asset managers and domestic banks have been establishing bullish views on the periphery for 2014 on the back of improving fundamentals,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. “However, with Fed tapering in sight, yields may move higher in general. Market conditions will be very delicate in early 2014 with the market looking for confirmation of the improving fundamentals to validate and extend the recent compression in spreads.” A bullish position is a bet an asset will appreciate.
Spanish five-year yields fell 10 basis points, or 0.1 percentage point, to 2.68 percent at 5 p.m. London time yesterday after sliding to 2.52 percent on Dec. 11, the lowest since September 2005. The 3.75 percent security due in October 2018 rose 0.43, or 4.30 euros per 1,000-euro ($1,373) to 104.82. Spain’s 10-year yield declined seven basis points to 4.10 percent.
The additional yield investors receive to hold the 10-year (GSPG10YR) securities instead of benchmark German bunds shrank to as little as 217 basis points on Dec. 11, the least since June 2011. The spread was 227 basis points yesterday.
Spanish lenders cut their borrowing from the European Central Bank to 220.5 billion euros in November from 234.8 billion euros in the previous month, the ECB said yesterday.
The Italian Treasury, which had canceled a bond sale that was previously scheduled for Dec. 12, bought back 3.99 billion euros of debt maturing between 2014 and 2017 on Dec. 10. The rate on Italian 10-year bonds slipped nine basis points this week to 4.09 percent.
ECB Council member Ewald Nowotny said Dec. 11 that a breakup of the euro area is no longer priced in by markets and yield spreads between lower-rated peripheral nations and core countries have narrowed. A Dec. 9 survey showed investor confidence in the euro-region held near an 18-month high this month, while a report the next day showed Italian economic growth was unchanged in the third quarter, the first time it hasn’t shrunk since the three months through June 2011.
Germany’s two-year yield increased three basis points to 0.25 percent this week after climbing to 0.26 percent yesterday, the most since Sept. 11. The 10-year bund yield fell one basis point to 1.83 percent.
U.S. policy makers will begin paring stimulus at their Dec. 17-18 meeting, according to 34 percent of economists surveyed on Dec. 6 by Bloomberg, an increase from 17 percent on Nov. 8. Euro-area industry reports on Dec. 16 will show services and manufacturing output expanded in December, according to the median estimates in Bloomberg News surveys of economists.
Spain is scheduled to sell debt due in 2018 and 2023 on Dec. 19.
Spanish bonds returned 11 percent this year through Dec. 12, according to the Bloomberg World Bond Indexes. Italy’s rose 7.5 percent, while German securities lost 1.8 percent.