Spain’s Bonds Rise as Demand Climbs at Sale; German Bunds Fall

Spain’s government bonds rose for the first time in three days as demand at an auction climbed to the most in at least nine years after the Federal Reserve pledged to keep interest rates low for the foreseeable future.

The nation’s 10-year yields dropped from the highest level in a week even after the U.S. central bank reduced debt purchases that have put downward pressure on global borrowing costs. German bunds fell, pushing benchmark 10-year yields toward the highest in two months amid speculation the Fed will keep reducing stimulus. Irish bonds rose, shrinking the nation’s 10-year spread over bunds to the narrowest since April 2010.

“There was quite a bit of spread widening in Spain before the auction,” said Jan von Gerich, a fixed-income strategist at Nordea Bank AB in Helsinki. “Now the supply has been digested there is room for a rally. The reaction to tapering in risk markets is showing that people expect the Fed to continue to be accommodative for some time yet.”

Spain’s 10-year yield dropped two basis points, or 0.02 percentage point, to 4.12 percent at 4:23 p.m. London time after climbing to 4.16 percent, the highest level since Dec. 9. The 4.4 percent bond due in October 2023 rose 0.195, or 1.95 euros per 1,000-euro face amount ($1,367), to 102.185.

Spain Auction

Spain sold a combined 2.54 billion euros of debt due in October 2018 and October 2023. The 10-year securities drew bids for 3.61 times the amount sold, the highest bid-to-cover ratio since Bloomberg began compiling the data in September 2004.

The 10-year bonds were sold at an average yield of 4.098 percent, the lowest since May 2010. The Madrid-based Treasury auctioned the five-year notes at a yield of 2.697 percent, versus 2.722 percent at the previous sale on Dec. 5.

The Fed said yesterday it would cut its monthly purchases of Treasuries and mortgage-backed debt known as quantitative easing to $75 billion from $85 billion starting in January.

Policy makers said the benchmark interest rate would likely stay low “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the central bank’s 2 percent goal.

German 10-year yields climbed three basis points to 1.87 percent after rising to 1.89 percent on Dec. 6, the highest level since Oct. 17. The Treasury 10-year rate rose five basis points to 2.94 percent after gaining six basis points yesterday.

“The decision meant Treasuries should underperform German bunds,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh, referring to the Fed’s announcement. “Since the Fed’s slight QE tapering was largely discounted, so the impact on bunds should be modest, particularly as the Fed signaled a rate hike is a long way off.”

Most Volatile

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

France’s two-year notes advanced after the nation’s debt office said it would cancel a bill auction scheduled for Dec. 30. The yield fell three basis points to 0.31 percent

Irish bonds rose, with 10-year yields dropping one basis point to 3.46 percent. The extra yield on the securities over similar-maturity German bunds shrank three basis points to 1.58 percentage points after contracting to 1.57 percent, the narrowest since April 22, 2010.

Spanish securities returned 11 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italy’s earned 7.6 percent, while Germany’s lost 1.7 percent, the worst performer of 15 euro-area debt markets tracked by the indexes.

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