Spanish Bond Yield Falls to 3-Week Low as Nation Exits Recession

Spain’s government bonds rose, pushing 10-year yields to the lowest level in three weeks, after a central-bank report estimated the nation emerged from recession in the third quarter.

The extra yield that investors get for holding Spain’s securities instead of similar-maturity German bunds shrank toward the narrowest in more than two years as signs the economy is improving bolstered the allure of its assets. German 30-year bonds halted a four-day advance after the nation sold 1.7 billion euros ($2.34 billion) of the securities.

“The fact that Spain is no longer in a recession means the government will have more revenue so it will be easier for them to reduce the deficit,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “This is one of the factors in favor of the Spanish spread narrowing.”

Spain’s 10-year yield fell seven basis points, or 0.07 percentage point, to 4.13 percent at 4:37 p.m. London time, the lowest since Oct. 2. The 4.4 percent bond maturing in October 2023 rose 0.535, or 5.35 euros per 1,000-euro face amount, to 102.15.

The spread over 10-year bunds shrank three basis points to 2.37 percentage points after contracting to 2.30 percentage points on Oct. 2, the narrowest since June 2011.

Spanish GDP

Spanish gross domestic product expanded 0.1 percent from the second quarter, when it shrank 0.1 percent, the Madrid-based Bank of Spain estimated in its monthly bulletin. The preliminary data matched the median estimate of 37 economists in a Bloomberg News survey.

Germany’s 10-year yield dropped three basis points to 1.76, the lowest since Sept. 30. Thirty-year yields were little changed at 2.66 percent.

The Federal Finance Agency allotted the securities due in July 2044 at an average yield of 2.64 percent, compared with 2.47 percent at a previous auction on July 31. The bid-to-cover ratio climbed to 2.64 times from 2.47 times.

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

Italy’s 10-year yield climbed two basis points to 4.12 percent after declining to 4.09 percent, the lowest level since June 5. The securities yielded 2.34 percentage points more than bunds, compared with 2.57 percentage points two weeks ago.

Stress Tests

The European Central Bank said today the definition of capital it uses to stress test banks will be stricter than the one in an imminent review of their assets.

While the ECB confirmed it will require lenders to have a capital ratio of 8 percent, what qualifies as capital will change over the course of the three-part assessment, it said in an e-mailed statement. The capital definition applicable on Jan. 1, 2014 will be used for the asset-quality review and the definition in force “at the end of the horizon” of the stress test will be used in that evaluation, it said.

For government bonds “the good news is that sovereign exposure will still be treated with zero-risk weights, i.e. not fall under the denominator for the 8 percent, as expected,” Christoph Rieger, head of fixed-rate strategy at Commerzbank AG in Frankfurt, wrote in a note to clients. “A few reservations remain, however.”

ECB President Mario Draghi said officials won’t hesitate to fail banks in its stress test next year as the central bank sets out to prove its vigilance in its role of banking supervisor.

Fed Purchases

Euro-area government bonds rose yesterday after a U.S. report showed American employers added fewer workers than economists forecast, boosting speculation the Federal Reserve will delay plans to trim its bond-purchase program known as quantitative easing.

“Peripheral spreads continue to narrow as the liquidity outlook remains constructive on the back of the ever more distant prospect of QE tapering in the U.S.,” said Richard McGuire, senior fixed-income strategist at Rabobank International in London, referring to the euro area’s lower-rated countries.

Spanish bonds returned 10 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italy’s gained 6.5 percent, while Germany’s lost 1.6 percent.

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