Spanish Bonds Climb as Rajoy Says Deficit Narrows

Spain’s government bonds advanced for a second day after Prime Minister Mariano Rajoy said the budget deficit narrowed last year, spurring optimism his efforts to repair the country’s finances are working.

The nation’s 10-year yields dropped to the lowest level in three weeks as Rajoy told lawmakers in Madrid that the worst threat to Spain from the region’s debt crisis was receding. German bunds fell, with 10-year yields rising the most in the week, as demand declined when the government auctioned 5 billion euros ($6.69 billion) of the securities. Portugal’s borrowing costs fell to the lowest in almost three years at an auction of 1.16 billion euros of 12-month bills.

“Rajoy said the worst is not over but the acute challenges have faded away,” said Christian Lenk, a fixed-income analyst at DZ Bank AG in Frankfurt. “He also pointed out there’s still a pretty long road to go and he will have to stick to austerity. The market seems to like it, given the move in Spanish yields.”

Spanish 10-year bond yields fell two basis points, or 0.02 percentage point, to 5.18 percent at 4:17 p.m. London time, after dropping to 5.13 percent, the lowest since Jan. 29. The 5.4 percent security due January 2023 rose 0.175, or 1.75 euros per 1,000-euro face amount, to 101.68.

The nation’s benchmark yield has now dropped more than 2 percentage points since climbing to a euro-era record of 7.75 percent on July 25.

“In a time of recession like the one Spain is going through now, I can inform you that Spain’s public deficit was below 7 percent of GDP last year,” Rajoy said before the annual parliamentary debate on the state of the nation.

Economists’ Forecasts

Economists surveyed by Bloomberg News forecast a gap of 8 percent of gross domestic product for last year, compared with a 6.3 percent target set by the European Union. The number includes European aid to recapitalize Spanish banks, which Rajoy’s figure doesn’t, and matches the European Commission’s November prediction.

The Madrid-based Treasury is scheduled to sell as much as 4 billion euros of debt maturing between 2015 and 2023 tomorrow. It last auctioned 10-year bonds on Dec. 5 at an average yield of 5.29 percent.

Spain is selling five-year dollar-denominated notes this week and may price the securities today, according to a person familiar with the deal who asked not to be identified because terms aren’t set.

Yield Cap

Spain is limiting the amount of interest its 17 semi-autonomous regions can pay to borrow, shutting many out of debt markets, as it seeks to repair the nation’s finances, two people familiar with the matter said.

The government wants administrations to pay yields no more than 100 basis points more than sovereign securities when they sell bonds, said the people, who asked not to be identified before the policy is announced.

Germany allotted 4.04 billion euros of 10-year government debt at an average yield of 1.66 percent, the Bundesbank said. The remainder went to the central bank. The rate compares with a yield of 1.56 percent at the previous auction on Jan. 16 and was the highest since April.

The nation received bids for 5.03 billion euros at the sale, compared with a 5 billion-euro target.

“It’s a weak German auction,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “It was only just covered. People seem to think there is limited upside to bunds at the moment because yields are very low. There’s a continuation of the theme of people seeking yields and that’s pressuring bunds.”

German Yields

Germany’s 10-year yield increased four basis points to 1.66 percent after climbing to 1.70 percent on Feb. 13, the highest level since Feb. 4.

Portugal sold bills due in February 2014 at an average yield of 1.277 percent, the lowest since April 2010, the debt management agency said. That compares with an average yield of 1.609 percent at a previous auction of 12-month bills on Jan. 16. It also sold 345 million euros of three-month securities at an average yield of 0.737 percent.

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

France is scheduled to auction as much as 8 billion euros of notes maturing between 2015 and 2018 tomorrow, as well as up to 2.5 billion euros of inflation-linked bonds due in 2024.

German government bonds handed investors a loss of 1.5 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities returned 2.3 percent and Italian debt gained 1.3 percent, the indexes show.

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