Spanish Yields Drop to 4-Month Low as Shutdown Stokes Fed Bets

Spanish sovereign bonds advanced, pushing 10-year yields to a four-month low, as stocks rose on speculation a partial shutdown of the U.S. government will deter the Federal Reserve from slowing its stimulus program.

Portuguese securities also climbed as investors bet the Fed would maintain asset purchases under its quantitative-easing plan as a bulwark against any slowdown in the economy caused by the first U.S. shutdown in 17 years. U.S. politicians also need to agree on increasing the debt ceiling this month. Italian bonds rose as Prime Minister Enrico Letta fought Silvio Berlusconi’s efforts to overthrow his ruling coalition. German bonds declined as demand for safer assets waned.

“The market is assessing what the shutdown might mean and what the impact on the debt ceiling might be,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S in Copenhagen. “This could lead to the Federal Reserve adding more QE to counter any potential slowdown in economic recovery, and that would benefit risky assets, including peripheral bonds.”

Spain’s 10-year yield fell nine basis points, or 0.09 percentage point, to 4.21 percent at 1:14 p.m. London time after touching 4.20 percent, the least since May 23. The 4.4 percent security due October 2023 rose 0.73, or 7.30 euros per 1,000-euro ($1,354) face amount, to 101.555.

The Stoxx Europe 600 Index of shares climbed 0.2 percent. The MSCI Asia Pacific Index added 0.4 percent.

Debt Ceiling

The partial U.S. shutdown will put as many as 800,000 federal employees out of work today after Congress failed to break a partisan deadlock. Lawmakers earlier voted against a funding bill linked to changes in President Barack Obama’s health-care legislation.

No further negotiations were immediately planned. The shutdown may lead to further confrontation on how to raise the U.S. debt limit before an Oct. 17 deadline to avert a default.

Germany’s 10-year bund yield climbed three basis points to 1.81 percent after dropping to 1.74 percent yesterday, the lowest level since Aug. 13.

The rate on similar-maturity Portuguese debt declined 14 basis points to 6.54 percent after reaching 6.51 percent, the least since Aug. 28.

Berlusconi withdrew his support for Italy’s five-month-old administration on Sept. 28 and five ministers from his People of Liberty party quit the Cabinet. Letta defied Berlusconi’s attempts to force early elections and said he’ll request a confidence vote for tomorrow to save his government.

The yield on Italy’s 10-year bond maturing in March 2024 slid six basis points to 4.52 percent.

Irish Volatility

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

Ireland’s bonds rose as the National Treasury Management Agency said in statement on its website that the nation had deferred a decision on selling debt until early 2014.

The yield on Ireland’s 3.9 percent security due March 2023 slid six basis points to 3.82 percent.

Spain’s bonds rose 9.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italian securities returned 3.7 percent and German debt lost 1.4 percent.

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