Spain Leads Slump in European Bonds as Bernanke Signals QE Exit

Spanish bonds led a decline in European government securities after Federal Reserve Chairman Ben S. Bernanke said U.S. policy makers may end asset purchases in mid-2014, sparking a global rout in fixed-income investments.

Spain’s 10-year yields surged the most in 11 months after demand fell at an auction of 4 billion euros ($5.28 billion) of debt. Italian and Portuguese bonds also slumped. German 10-year yields climbed to the highest level since February after Bernanke said yesterday that the Fed may “moderate” its $85 billion in monthly purchases this year if growth is consistent with the Fed’s forecasts.

“The Fed move makes the price of most asset classes look wrong,” said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland Group Plc in London. “Higher-yielding European assets like Portugal are getting hurt and Italy and Spain aren’t far behind. In a world where they’ve been doing well it doesn’t take a lot to shake the market.”

Spain’s 10-year yield climbed 33 basis points, or 0.33 percentage point, to 4.87 percent at 4:37 p.m. London time, the biggest increase since July 5. The 5.4 percent bond maturing in January 2023 fell 2.61, or 26.10 euros per 1,000-euro face amount, to 104.

Spanish yields are still down from a euro-era record 7.75 percent on July 25. Spanish securities handed investors a return of 6.1 percent this year, according to Bloomberg World Bond Indexes. German bonds have lost 0.9 percent and Italian bonds earned 3.3 percent in the same period.

The rate on Italian 10-year debt increased 29 basis points to 4.55 percent. Portugal’s 10-year yields jumped 34 basis points to 6.41 percent.

Fed Purchases

The Fed will probably start to reduce its $85 billion in monthly bond buying this year and halt purchases around mid-2014 as long as the world’s largest economy performs in line with Fed projections, Bernanke said to reporters yesterday in Washington after a two-day meeting of the Federal Open Market Committee.

Euro-area government securities fell with 10-year Treasuries even as an industry report showed services and manufacturing output in the region shrank less than economists forecast in June. U.S. 10-year yields climbed to as high as 2.47 percent, the highest since August 2011.

“Markets are likely to remain volatile and investors risk-averse,” Gary Dugan, Singapore-based chief investment officer for Asia and the Middle East at Coutts & Co., wrote in an e-mailed note to clients. “The Federal Reserve is determined to taper quantitative easing before the end of the year.”

Spain Sale

Spain allotted 1.52 billion euros of 4.4 percent bonds maturing in October 2023 at an average yield of 4.77 percent. It last sold 10-year securities on June 6 at 4.517 percent, the lowest level for that maturity since September 2010. Investors bid for 1.84 times the amount on offer, down from 2.52 times last month. Spain also sold debt maturing in 2018 and 2021.

Spain has raised 76.8 billion euros through mid- and long-maturity debt issuance as part of its 2013 funding program, the nation’s economy ministry said in a statement.

The composite index of euro-area services and manufacturing, published by Markit Economics and based on a survey of purchasing managers, rose to 48.9 this month from 47.7 in May. The median of estimate in a Bloomberg News survey was for an increase to 48.1. A reading below 50 signals contraction.

Germany’s 10-year bund yield climbed 10 basis points to 1.66 percent after rising to 1.68 percent, the highest since Feb. 20. Two-year German yields increased eight basis points to 0.24 percent. They touched 0.25 percent, the most since Feb. 4.

Treasuries underperformed their euro-area counterparts this week, with the extra yield investors demanding to hold 10-year U.S. securities instead of German ones widening to 73 basis points, up from 62 basis points last week.

Most Volatile

Volatility on Belgian bonds was the highest among euro-region markets today followed by those of Spain and the Netherlands, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.

Belgian 10-year yields increased 19 basis points to 2.54 percent, while similar-maturity Dutch rates rose 15 basis points to 2.07 percent.

France sold 3.3 billion euros of three-year notes at an average yield of 0.5 percent, up from 0.21 percent at a previous sale on May 16. It also auctioned 4.1 billion euros of five-year debt at 1.24 percent. That compares with a rate of 0.74 percent at a prior sale on May 16.

France also auctioned inflation-linked securities, while Ireland sold 91-day bills.

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