Spain’s ECB-Fueled Bond Rally Halts With Italy Amid Debt Sales

Spain’s government bonds declined this week, with yields climbing from a record, as the nation sold 9 billion euros ($12.2 billion) of 10-year debt via banks, capitalizing on a surge in demand for its securities.

Italian bonds also dropped as the country auctioned $8.5 billion euros of debt with maturities of three, seven and 30 years. German two-year note yields declined to the lowest level in a year as the European Central Bank’s decision to charge lenders for overnight cash deposits pushed money-market rates toward zero, fueling demand for short-dated fixed-income assets.

“This week will only enter the history books as a supply-induced little hiccup,” David Schnautz, a fixed-income strategist at Commerzbank AG in New York, said by phone yesterday. “Next week we should trade with a constructive tone again in the big peripherals. A lot of investors are keen on moving out the curve because of the long time span the ECB measures will be in place.” A yield curve is a chart covering bonds of different maturities.

Spain’s 10-year yield rose two basis points, or 0.02 percentage point, in the week, to 2.66 percent at yesterday’s 5 p.m. London close after dropping to a record 2.542 percent on June 10. The 3.8 percent security maturing April 2024 fell 0.165, or 1.65 euros per 1,000-euro face amount, to 109.815. Italy’s 10-year yield climbed one basis point to 2.77 percent after dropping to a record 2.694 percent on June 9.

Fading Crisis

Investors snapped up higher-yielding euro-area securities this year on signs the sovereign debt crisis that sparked four years of financial turmoil has been consigned to history. The ECB unveiled a stimulus package on June 5 including interest-rate cuts and loans to banks, adding further fuel to the rally.

Germany’s two-year note yield fell three basis points in the week to 0.03 percent after touching 0.025 percent yesterday, the least since May 2013. The one-week Eonia swap rate, a gauge of the cost for banks to lend to each other in euros, fell to 0.004 percent, according to ICAP Plc data, the least on record. The rate indicates banks are willing to make loans at almost no cost for the borrower, rather than face the higher penalty of 0.1 percent for keeping excess funds at the ECB.

Investors bid for 18.5 billion euros of the Spanish securities sold two days ago, which were priced to yield 118 basis points more than the mid-swaps rate, or 2.8 percent, according to a statement from the Spanish Treasury. The nation has now covered 65.2 percent of its planned medium- and long-term issuance this year, it said. It plans to sell three- and five-year debt next week.

Italy sold 3.5 billion euros of notes maturing in 2017 at 0.89 percent, a record-low for three-year notes. It also auctioned 4 billion euros of 2021 bonds and 1 billion euros of 2044 debt.

Spain’s bonds earned 9.3 percent this year through June 12, Bloomberg World Bond Indexes show. Italian securities returned 8.4 percent, while Germany’s rose 3.9 percent.

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