Euro-Area Bonds Decline Amid Speculation Rally Losing Momentum

The euro-area’s higher-yielding government bonds declined amid speculation a rally that has driven borrowing costs to record lows is losing momentum.

Portugal’s 10-year bonds fell for a fourth day, while those of Spain and Italy declined for a second day. Securities from Portugal to Greece have surged since June 5, adding to this year’s rally, when the European Central Bank cut interest rates and announced a package of stimulus measures to boost liquidity in the euro region. Benchmark German bunds fell for the first time since June 10. Cyprus was said to be preparing to sell five-year debt via banks.

“There’s been a fantastic rally and the bias in the market is to look for an excuse” to reduce holdings, said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in London. “We have seen some decent outflows from euro-zone funds, both in the core and periphery, and that’s beginning to weigh on the market.”

Portugal’s 10-year yield increased four basis points, or 0.04 percentage point, to 3.46 percent at 4:21 p.m. London time after falling to 3.23 percent on June 10, the least since 2005. The 5.65 percent bond due in February 2024 fell 0.415, or 4.15 euros per 1,000-euro ($1,354) face amount, to 117.67.

Spain’s 10-year yield climbed four basis points to 2.71 percent and the rate on Italy’s 10-year debt increased four basis points to 2.83 percent.

The average yield to maturity on bonds from Greece, Ireland, Italy, Portugal and Spain fell to 1.91 percent on June 9, the lowest since the formation of the currency bloc in 1999, according to Bank of America Merrill Lynch indexes. The rate was 1.97 percent as of yesterday.

Negative Rate

ECB policy makers cut the central bank’s deposit rate to minus 0.1 percent and lowered the main refinancing rate to a record 0.15 percent at a meeting on June 5, where they also announced targeted longer-term refinancing operations.

Spain is scheduled to sell as much as 3 billion euros in three- and five-year notes tomorrow.

The Madrid-based Treasury sold 9 billion euros of 10-year debt last week via banks, including a swap for notes maturing in 2015, as it sought to capitalize on a boost in demand for its securities.

Cyprus plans to sell five-year government debt via banks, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it. The bonds may be priced tomorrow to yield about 5 percent, the person familiar said.

Germany is scheduled to auction 5 billion euros of bunds due in May 2024 tomorrow. It last sold 10-year debt on May 21 at an average yield of 1.41 percent. The 10-year bund yield climbed five basis points today to 1.40 percent. The nation’s five-year rate increased four basis points to 0.43 percent.

Portugal’s securities earned 16 percent this year through yesterday, Bloomberg World Bond Indexes show. Italy’s returned 8.7 percent, Spain’s 9.6 percent and Germany’s gained 4.2 percent.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE