Spanish Bonds Drop a 2nd Week on Bets ECB Rates Spur Is Waning

Spain’s government bonds fell for a second week as investors bet a rally after the European Central Bank introduced new stimulus was overdone and as the nation extended a run of debt sales.

The extra yield investors get to hold Spanish bonds instead of German bunds widened to the most since June 6, the day after ECB President Mario Draghi unveiled a package of measures that drove yields across the region down to records. German two-year note yields touched the lowest in more than a year as a gauge of overnight borrowing costs in euros fell to a record. Italy’s bonds slid as the nation sold securities in an exchange auction.

“There was the big tightening after the ECB and then we’ve retraced,” Peter Chatwell, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London, said yesterday. “The rally was just a little bit too far and the markets have taken the opportunity to moderate that. But we’re still on a very bullish trend line. The move in peripheral spreads wider was initiated with a lot of supply coming into the market.”

Spain’s 10-year yield rose seven basis points, or 0.07 percentage point, in the week to 2.73 percent at 5 p.m. London time yesterday. The 3.8 percent bond due in April 2024 dropped 0.645, or 6.45 euros per 1,000-euro ($1,359) face amount, to 109.17. The yield spread with bunds rose to as much as 1.42 percentage points.

Bund Yields

German 10-year yields fell two basis points to 1.34 percent, while those on two-year notes dropped to 0.022 percent on June 16, the lowest since May 2013. Italy’s 10-year yield rose for a second week, adding six basis points, to 2.95 percent. The euro overnight index average, or Eonia, was set at 0.01 percent on June 19 signaling banks would receive almost no interest for making loans.

Bonds from Greece to Portugal have rallied this year amid signs the euro region’s debt crisis has been consigned to history. They extended gains after the ECB cut interest rates, and introduced charges on lenders for depositing cash with the central bank. Spain has issued 16.6 billion euros in securities in the past three weeks in auctions and via banks, taking advantage of lower borrowing costs, without having any redemptions.

A purchasing managers’ index of services output rose to 53.3 in June from 53.2 the prior month, Markit Economics will say on June 23, staying above the 50 mark that indicates growth for an 11th month. That would be the highest reading since June 2011.

Spain’s securities returned 9.2 percent this year through June 19, Bloomberg World Bond Indexes show. Italy’s earned 8.4 percent and Germany’s gained 4.3 percent.