Bloomberg News

Spanish Bonds Rise, Bunds Drop as Stock Gains Stoke Risk Demand

July 19, 2011

July 19 (Bloomberg) -- Spanish and Italian 10-year bonds jumped, while German bunds fell for the first time in four days as stock markets rallied amid speculation European leaders will move closer to resolving the region’s debt crisis.

The gains sent Italian 10-year yields down by the most since May 2010, even as German Chancellor Angela Merkel said Europe’s debt crisis can’t be fixed “in one step.” Spanish debt snapped a three-day decline as the government sold bills at an auction. Greek notes plunged as European Central Bank council member Ewald Nowotny said the ECB’s aim is to “avoid any situation” that would make it impossible for the ECB to continue to accept Greek bonds as collateral. The Stoxx Europe 600 Index rose 0.8 percent.

“Investors are less pessimistic about the outcome for Thursday’s summit and think there might be potential for compromise,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “We see equities up, some peripheral bonds rising and bunds down. It’s a broad-based move. We had very negative markets yesterday and there is a bit of a correction.”

Spain’s 10-year bond yields fell 24 basis points to 6.08 percent at 4:25 p.m. in London. The yield reached a euro-era record of 6.37 percent yesterday. The 5.5 percent security maturing in April 2021 rose 1.63, or 16.30 euros per 1,000-euro ($1,419) face amount, to 95.780. Two-year note yields slid as much as 29 basis points to 4.27 percent, the biggest intraday drop since December.

Spanish Auction

Spain sold 4.45 billion euros of 12- and 18-month bills, below the maximum objective of 4.5 billion euros. The Treasury in Madrid auctioned 3.79 billion euros of 364-day securities at an average yield of 3.702 percent, up from 2.695 percent the last time the securities were sold on June 14. It also issued 661 million euros of 511-day debt at an average yield of 3.912 percent, higher than the 3.26 percent result last month.

Greece sold 1.625 billion euros of 13-week bills at a uniform yield of 4.58 percent, the debt agency said.

The euro strengthened 0.4 percent to $1.4171 and the yield on the 10-year German bund, the region’s benchmark government debt security, increased three basis points to 2.68 percent.

The 10-year U.S. Treasury yield rose one basis point to 2.94 percent.

European Union leaders are preparing for a summit in two days to hammer out a solution to the Greek debt crisis, which spread to Ireland and Portugal and threatens Italy and Spain.

‘Political Responsibility’

“Those who want to take political responsibility, and that’s what the government wants and takes seriously, know that responsibly there won’t be one spectacular step” this week, Merkel told reporters in Hanover, Germany, today. “It’s entirely about creating a controlled, composed process of gradual steps and measures.”

While Germany wants private investors to participate in a second bailout package for Greece, ECB President Jean-Claude Trichet has said policy makers won’t accept Greek government bonds as collateral for loans in the event of a default or “credit event.”

Nowotny said on CNBC earlier today that it’s up to the ECB to decide what collateral it accepts and it “should not be totally dependent on rating agencies.”

“This increases the chances of an agreement at Thursday’s emergency EU summit,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh, a broker for banks.

Greek Notes Tumble

French Finance Minister Francois Baroin said yesterday that he was “confident” that an agreement on Greece would be reached that would satisfy the ECB.

Greek two-year yields surged as much as 326 basis points to 39.24 percent, while the nation’s 10-year bond yields declined 18 basis points to 18.03 percent. Ireland’s two-year note yields reached a euro-era record of 23.50 percent, while Portugal’s climbed to 20.42 percent, also a record.

“On the Greek two-year, the market is speculating ahead of Thursday’s meeting if there will be a haircut, if a haircut will be agreed to and what size it will be,” said Norbert Aul, a European rates strategist at RBC Capital Markets in London.

Ten-year bund yields reached 2.62 yesterday, the least since July 12, when they dropped to 2.50 percent. Yields on German two-year notes were six basis points higher at 1.25 percent. They were at 1.05 percent on July 12, the least since Jan. 13.

Auction Demand

Italy’s 10-year yields tumbled 26 basis points to 5.71, the biggest intra-day decline since May 10, 2010. The yield difference, or spread, between the securities and similar- maturity bunds narrowed to 3.04 percentage points, or 304 basis points.

Demand for the Spanish 12-month bills today was 2.18 times the amount of securities sold, compared with 2.85 last month, and the bid-to-cover for the longer-maturity debt was 5.49 times, compared with 3.91.

“Over the near term, the low size range of the Spanish auction may be a supportive factor,” Aul said. “Spain will have to increase their auction sizes again going forward, and eventually issue a new 10-year, and that poses a risk,” because yields are at relatively high levels, he said.

German government bonds handed investors 2.5 percent this year, compared with 3.6 percent for U.S. Treasuries and 4.1 percent for U.K. gilts, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek bonds lost more than 23 percent, while Spain’s declined 1.6 percent and Italian debt lost 4.4 percent, the indexes show.

--Editors: Mark McCord, Keith Campbell

To contact the reporters on this story: Emma Charlton in London at; Garth Theunissen in

To contact the editor responsible for this story: Daniel Tilles at

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