Spain's government bonds surge

Spain’s government bonds surged yesterday, with two-year yields falling to the lowest level since October 2010, after the nation sold more securities than planned at its first debt auction this year. Spanish 10-year yields fell below 5 per cent for the first time since March and Italian bonds also rallied as optimism the European financial crisis is easing spurred demand for the debt of so-called peripheral countries.

German bonds slumped, with two- and 10-year yields climbing to the highest levels in 11 weeks, after the European Central Bank refrained from cutting its key interest rate and President Mario Draghi said the decision was “unanimous”.

“The auction went very well and the size was also higher than the market was expecting,” said Mohit Kumar, head of European interest-rate strategy at Deutsche Bank AG in London.

“German bonds are falling as Draghi is being on the constructive side. That is paring down market expectations of an ECB rate cut in the near future.”

Spain’s two-year yields slid 29 basis points, or 0.29 percentage point, to 2.10 per cent as European markets closed, after falling to 2.08 per cent, the lowest since October 2010. The 3.3 per cent note due in October 2014 rose 0.515, or €5.15 per €1,000 face amount, to 102.08. The country’s 10-year yield declined as much as 24 basis points to 4.89 percent, the lowest level since March 2nd.

The gap between Italy’s two- and 10-year yields widened to 285 basis points, the most since November.

Spain sold a combined €5.8 billion of securities, above its target of €5 billion. Investors bought January 2018 notes at an average yield of 3.988 per cent, versus 4.68 per cent at the previous auction in November.

“When you stack some of these countries like Spain and Italy against the alternatives in global fixed-income, they look like pretty good yields,” Andrew Bosomworth at Pacific Investment Management in London, said. – (Bloomberg)