Spanish Bonds Outperform After Debt Sale; German Bunds Decline

Spanish bonds outperformed their German equivalents with the extra yield on Spain’s 10-year securities shrinking toward the lowest since April 2011 after the nation sold a record amount of debt through banks.

The country’s 10-year bonds pared earlier gains as the Madrid-based Treasury confirmed that Spain issued 10 billion euros ($13.6 billion) of debt after receiving more than 39.6 billion euros of bids. Germany’s 10-year bonds fell for the first time in five days as demand for safer investments waned.

“The order book for the Spanish sale was massive,” said Christoph Rieger, head of interest-rate strategy at Commerzbank AG in Frankfurt. “It underscores the demand for yield pickup in this environment.”

Spanish 10-year yields were little changed at 3.74 percent at the 5 p.m. close of trading in London after dropping as much as six basis points. The price of the 4.4 percent bond maturing in October 2023 was 105.33.

The spread of the securities over similar-maturity German bunds shrank two basis points, or 0.02 percentage point, to 1.98 percentage points. It contracted to 1.75 percentage points on Jan. 9, the narrowest since April 13, 2011.

The bonds issued today were sold to yield 178 basis points over the mid-swap rate, or 3.845 percent, the Treasury said. At a similar sale on May 14, Spain sold 7 billion euros of bonds maturing in October 2023 at a yield of 278 basis points over the mid-swap rate.

‘Unthinkable’ Demand

The demand for the new Spanish issue would have been “unthinkable a year ago,” Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, wrote in a research note. “Global commitment to fixed income as an asset class remains off the charts given low rates and spread compression.”

Government bonds in Europe’s most indebted countries will offer investors solid returns in 2014, according to BlackRock Inc., the world’s largest asset manager.

“We’ve had a very big rally in Spain and Italy,” Stephen Cohen, head of investment strategy for international fixed income, told reporters today in London. “It’s been a very high-performing part of fixed income in the last six months. Clearly that speed is not going to be maintained, but it’s going to be supported. We continue to see opportunities in places like Portugal where we continue to have higher yields.”

Italy’s 10-year yield was little changed at 3.83 percent, while Portugal’s declined one basis point to 5.05 percent.

German Sale

Germany’s 10-year yield climbed two basis points to 1.76 percent after dropping nine basis points during the previous four days.

The nation auctioned 3.52 billion euros of notes due in December 2015 today at an average yield of 0.15 percent compared with 0.21 percent at the previous sale on Dec. 11.

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

Dutch 30-year securities fell as the Netherlands said it would sell a new bond due in January 2047. Yields on securities maturing January 2042 rose three basis points to 2.80 percent.

Spain’s bonds returned 13 percent in the 12 months through yesterday, according to Bloomberg World Bond Indexes. Italy’s rose 7.3 percent and Germany’s gained 0.4 percent.

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