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Spanish Bonds Rise as Recovery Prompts Search for Higher Yields

Spain’s bonds advanced this week, with 10-year yields falling the most since September 2012, as signs the euro-area economy is gaining momentum boosted demand for securities with higher returns than those on German debt.

The extra yield investors demand to hold Spanish 10-year debt over similar-maturity German bunds dropped below 2 percentage points yesterday for the first time since May 2011 as unemployment in Spain fell. Separate data this week showed manufacturing in Italy and Spain expanded more last month than economists forecast. The region’s bonds have also been supported by European Central Bank President Mario Draghi’s pledge to keep interest rates low to support the economy.

“We’ll see a modest recovery in the euro zone, we still have a central bank that’s willing to do everything it can to support that recovery and that should help boost investor interest in peripheral bonds,” Christian Lenk, a fixed-income analyst at DZ Bank AG in Frankfurt, said, referring to the region’s higher-yielding government-debt securities.

Spain’s 10-year yield dropped 35 basis points, or 0.35 percentage point, this week, to 3.87 percent at 5 p.m. London time yesterday. That’s the biggest decline since the period ended Sept. 7, 2012. The 4.4 percent bond maturing in October 2023 climbed 2.845, or 28.45 euros per 1,000-euro ($1,360) face amount, to 104.21.

The yield spread over benchmark German bunds narrowed to as little as 193 basis points yesterday, down from a euro-era record 650 basis points set in July 2012. Italy’s 10-year yield dropped 30 basis points this week to 3.92 percent. That’s the biggest decline since April 5.

Highest Level

Rates on German 10-year bunds fell one basis point this week to 1.94 percent after rising to 1.97 percent on Jan. 2, the highest level since Sept. 23.

Unemployment in Spain fell 107,570 last month, the biggest drop since June, the Madrid-based Ministry of Labor said yesterday. An Italian gauge based a survey of purchasing managers climbed to 53.3 in December from 51.4 in November, while Spain’s was 50.8, beating a forecast of 49.8 in a Bloomberg News survey of analysts.

Spain is scheduled to sell bonds due in 2019 and 2028 on Jan. 9, while France plans to auction debt maturing between 2020 and 2060. The ECB will keep its main refinancing rate at a record-low 0.25 percent the same day, according to all of the economists in a Bloomberg News survey.

Draghi will hold a press conference in Frankfurt after the announcement. He said after the central bank’s previous meeting on Dec. 5 that policy makers were ready to keep interest rates low “for an extended period.”

Spanish government bonds returned 11 percent in the past year through Jan. 2, according to Bloomberg World Bond Indexes. Italy’s earned 7 percent, while Germany’s lost 1.4 percent, the worst performer of 15 euro-area sovereign-debt markets tracked by the indexes.

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