Bloomberg News

Spanish Bonds Fall Before Debt Auction; Portuguese Notes Decline

April 03, 2012

Spanish bonds fell, snapping a two- day gain, as the nation prepared to sell as much as 3.5 billion euros ($4.67 billion) of government debt tomorrow.

Spain’s securities led losses among the region’s higher- yielding debt after a report showed unemployment increased last month, adding to concern the nation will struggle to cut its budget deficit. Italian and Portuguese bonds also declined, while German bunds were little changed. The European Financial Stability Facility and Belgium auctioned bills today.

“The market is pricing in a concession ahead of tomorrow’s supply,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “There’s a need to cheapen the bonds, given the constant drip of downbeat data and the worries about the extent of the fiscal challenge.”

The yield on Spain’s 10-year bond rose 10 basis points, or 0.1 percentage point, to 5.45 percent at 5 p.m. London time. The 5.85 percent security due January 2022 fell 0.77, or 7.70 euros per 1,000-euro face amount, to 102.96. Two-year yields rose six basis points to 2.54 percent.

The number of people registering for jobless benefits in Spain increased 38,769 in March to 4.75 million, the Labor Ministry said today. The nation’s debt will reach 79.8 percent of gross domestic product this year, up from 68.5 percent last year, the government said in its 2012 budget plan.

Spain will auction notes due between January 2015 and October 2020 tomorrow.

‘Fiscal Backdrop’

“Spain’s selloff is related to tomorrow’s supply,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “The market is content to factor in a concession, especially in light of current concerns around the Spanish fiscal backdrop. The auctions should provide some indication of how easy or difficult they will find it to raise money in this environment.”

Spain will get external aid from European authorities and the International Monetary Fund this year to help overcome its debt crisis, while retaining the ability to raise funds through bond sales, Citigroup Inc. analysts Ebrahim Rahbari and Guillaume Menuet wrote today in a note to clients.

The nation’s 10-year yield dropped in December and January, reaching a 16-month low of 4.83 percent on March 1, as the European Central Bank offered unlimited three-year loans to the region’s financial institutions through its so-called longer- term refinancing operations.

‘Losing Momentum’

“The LTRO effect is losing momentum,” said Michael Leister, a fixed-income strategist at DZ Bank AG in Frankfurt. “We’d expect some concession with Spanish paper cheapening as investors try to squeeze out every basis point they can.”

Italian bonds declined even as Development Minister Corrado Passera denied a Financial Times report that the country may need further budget adjustments to reach its targets.

Italy’s 10-year yield rose five basis points to 5.16 percent after reaching 5.32 percent on March 30, the highest since Feb. 29.

Portuguese (GSPT2YR) two-year notes fell for a fourth day, the longest losing streak since October. The yield rose 14 basis points to 9.98 percent.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., wrote that a voluntary exchange of Portuguese debt by the private markets “seems inevitable” in a message posted on Twitter today.

Bill Sale

Portugal plans to sell 192- and 556-day bills tomorrow, while Germany is scheduled to auction as much as 4 billion euros of five-year notes. The ECB will leave its benchmark interest rate unchanged when it meets to decide monetary policy in Frankfurt, according to 57 economists in a Bloomberg poll.

The EFSF sold 1.98 billion euros of three-month bills at an average yield of 0.112 percent, compared with a rate of 0.052 percent at a previous auction on March 6. Investors bid for 2.35 times the amount allotted, versus 1.98 times last month.

The yield on the EFSF bond due July 2021 fell four basis points to 2.84 percent.

Germany’s 10-year bund yield was unchanged at 1.8 percent. The two-year rate fell one basis point to 0.2 percent.

The German two-year yield is consolidating below its 100- day moving average at 0.245 percent and around its 50-day moving average at 0.223 percent, according to data compiled by Bloomberg. It may find support at the March 13 high at 0.19 percent, with resistance at the February high of 0.289 percent.

German bonds returned 0.3 percent last quarter, their worst performance in a year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portuguese bonds gained 13 percent, the biggest advance among 26 sovereign markets tracked by the indexes.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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