Spain’s Notes Decline as Quicker Inflation Reduces Stimulus BetsNeal Armstrong
Spanish notes led declines among euro-area government securities this week as reports showing inflation quickened damped the case for European Central Bank stimulus that tends to boost shorter-maturity debt.
The nation’s five-year yields climbed the most since August before the country sells debt due in April 2017 and October 2018 next week. Spanish consumer prices increased in November after stagnating the previous month, while the euro-area inflation rose more than economists forecast, reports showed this week. Benchmark German bunds rose along with French, Austrian and Dutch securities.
“After inflation data this week some further easing expectations could be priced out,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. “Since three-to-five-year Spain benefited the most from that, it could be unwound. There’s been a lot of buying of five year in the periphery and it is natural that some accounts may be reducing exposure,” he said, referring to the securities of Europe’s high debt and deficit nations.
Spain’s five-year yield jumped 14 basis points, or 0.14 percentage point, this week to 2.69 percent at the close of trading yesterday, the biggest increase since the period ended Aug. 9. The 3.75 percent note due October 2018 dropped 0.67, or 6.70 euros per 1,000-euro ($1,361) face amount, to 104.82.
The 10-year rate climbed two basis points to 4.12 percent. The extra yield investors demand to hold 10-year bonds instead of five-year securities narrowed 12 basis points to 143 basis points after expanding to 160 basis points on Nov. 27, the widest since September 2012.
“The 5s-10s slope is too steep from a fundamental valuation perspective and relative to the shape and level of the rest of the curve,” Morgan Stanley strategists including Anton Heese in London wrote in a research note yesterday.
Spain’s annual inflation rate rose to 0.3 percent in November after prices were unchanged in October, the National Statistics Institute said Nov. 28. The euro-area rate increased to 0.9 percent from 0.7 percent, the European Union’s statistics office said yesterday.
The ECB unexpectedly cut its main refinancing rate to 0.25 percent from 0.5 percent on Nov. 7 to prevent slowing inflation from taking hold in the euro-area economy. ECB President Mario Draghi said at the time the region needed record-low borrowing costs to combat a “prolonged” period of weak consumer-price growth and “very high” unemployment.
German 10-year yields dropped five basis points this week to 1.69 percent, France’s fell five basis points to 2.15 percent, Austria’s declined four basis points to 2.04 percent and Dutch rates fell three basis points to 2.03 percent.
Other European debt auctions next week include Germany selling 4 billion euros of five-year notes on Dec. 4 and France offering securities due between 2018 and 2027 the following day.
Spain’s bonds returned 11 percent this year through Nov. 28, the third-best performer of 15 euro-area gauges compiled by Bloomberg World Bond Indexes. Italian securities earned 7.6 percent, while Germany’s lost 1 percent.