Spanish Bonds Rise a 7th Day After Debt Sale; Bunds Drop

Spanish 10-year bonds climbed for a seventh day as borrowing costs fell at a debt sale and European Central Bank President Mario Draghi said data suggest the euro-area economy will stabilize.

Spain’s 10-year yields approached the lowest in more than a year as the nation exceeded its target at an auction of government debt. German bunds led losses among so-called core markets as Draghi’s comments damped demand for safer assets. The yield on Portugal’s five-year notes fell to the lowest level in more than two years after Standard & Poor’s raised the country’s credit-rating outlook.

“Overall Draghi has struck quite a positive tone, keeping his accommodative stance, and the market is reacting to that,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London.

Spanish 10-year yields dropped 11 basis points, or 0.11 percentage point, to 4.90 percent at 4:44 p.m. London time. The rate dropped to 4.84 percent on Jan. 11, the lowest level since March 1, 2012. The 5.4 percent security due in January 2023 rose 0.865, or 8.65 euros per 1,000-euro face amount, to 103.875.

The ECB’s decision to hold its main refinancing rate at 0.75 percent was forecast by 56 of 61 economists in a Bloomberg survey. The rest predicted a cut to 0.5 percent.

‘Gradually Recover’

Economic activity should “gradually recover” in 2013, Draghi said at a press conference in Frankfurt after the rate decision. Inflation risks are broadly balanced, he said.

Germany’s 10-year bund yield increased four basis points to 1.49 percent, and reached 1.51 percent, the most since Feb. 26. Two-year note yields climbed five basis points to 0.085 percent.

Spain auctioned 5.03 billion euros of debt, compared with a target of 5 billion euros. It allotted 2.44 billion euros of 10-year bonds at an average yield of 4.917 percent, the lowest since November 2010. It also sold 2015 and 2018 notes today.

Investors bid 2.27 times the amount of 2023 securities sold, up from a so-called bid-to-cover of 1.60 last month.

“Spain slightly managed to overshoot the maximum target range and this is something the market will cheer,” said Michael Leister, an interest-rates analyst at Commerzbank AG in London. “At first glance it looks like a good auction.”

The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity German debt narrowed 15 basis points to 340 basis points, after reaching 338 basis points, the least since Feb. 25.

Portuguese Yields

Portuguese five-year yields slid 15 basis points to 4.68 percent, after falling to 4.65 percent, the lowest since December 2010. The 10-year rate dropped 22 basis points to 5.93 percent, the least since Jan. 24.

“The outlook revision reflects additional evidence that European institutions will continue to support Portugal’s adjustment program, given the government’s commitment to budgetary and structural reforms,” S&P said in a statement released today.

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

Draghi said the effect of Italy’s inconclusive election on financial markets was limited as Prime Minister Mario Monti’s economic reforms will survive the political impasse.

“After some excitement after the elections, markets have now reverted back more or less to where they were before,” Draghi said. “Much of the fiscal adjustment Italy went through will continue going on automatic pilot.”

Italy’s 10-year bonds rose for a third day, pushing the yield down six basis points to 4.60 percent.

Spanish debt returned 3.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portuguese securities gained 2.2 percent, while German bunds handed investors a loss of 0.5 percent.

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