Spanish 10-year government bonds rose for a second day as global stocks advanced, underpinning investor demand for higher-yielding assets.
Germany's 10-year bund rates increased to a 10-week high as European stocks rose for a second day, damping demand for the euro area's safest assets. Italy sold 2.5 billion euros ($3.23 billion) of zero-coupon notes maturing in 2014 at a record-low yield. Dutch 10-year government bond yields climbed to the highest level in two months as the Netherlands auctioned 2.32 billion euros of the securities at a debt sale.
"The rise in Spanish bonds fits into the hunt-for-yield environment," said Rainer Guntermann, a rates strategist at Commerzbank AG in Frankfurt. "The yield-spread compression between peripherals and bunds should continue. Funding progress looks a little more favorable for Italy than Spain."
Spain's 10-year bond yields dropped six basis points, or 0.06 percentage point, to 4.27 percent at 3:06 p.m. London time. The 5.4 percent bond maturing in January 2023 rose 0.525, or 5.25 euros per 1,000-euro face amount, to 108.79.
The yield difference, or spread, between Spanish 10-year yields and their German equivalents narrowed nine basis points to 278 basis points.
Nonresident holdings of Spanish bonds rose to 38.4 percent in April from 37.2 percent in March, according to a report on the Treasury's website today. Domestic banks' holdings declined to 30.6 percent from 32.9 percent.
The European Commission will decide tomorrow whether to grant Spain until 2016 to bring its deficit back within the European Union limit of 3 percent of gross domestic product. Its verdict is due as data this week including mortgage lending, gross domestic product and inflation may underline that the construction slump that triggered the nation's economic crisis in 2008 is far from over.
Italy sold zero-coupon notes maturing in December 2014 at a record-low yield of 1.113 percent, down from 1.167 percent at the previous auction on April 24. Investors bid for 1.57 times the amount allotted, compared with 1.66 times last month.
The Rome-based Treasury also sold 987 million euros of inflation-linked bonds due in 2018 at 1.83 percent.
Italy's 10-year bond yield dropped four basis points to 4.01 percent.
Yields on benchmark German 10-year bunds rose three basis points to 1.49 percent, the most since March 14. The Stoxx Europe 600 Index of shares rose for a second day, gaining 1.6 percent, while the Standard & Poor's 500 index gained 1.4 percent.
Spain's government bonds handed investors a loss of 1.1 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German securities dropped 1.2 percent and Italian bonds declined 0.3 percent.