Bloomberg News - Gold Mint Runs Overtime in Race to Meet World Coin Demand

Photographer: Gianluca Colla/Bloomberg

Small balls of solid gold are collected in a basin during the semi-automated gold manufacturing process at a precious metal refinery near Mendrisio, Switzerland

 Austria’s mint is running 24 hours a day to meet orders for gold coins, joining counterparts from the U.S. to the U.K. toAustralia in reporting accelerating demand boosted by the bear market in bullion.

Austria’s Muenze Oesterreich AG mint hired extra employees and added a third eight-hour shift to the day in a bid to keep up with demand. Purchases of bullion coins at Australia’s Perth Mint rose 20 percent this year through Jan. 20 from a year earlier. Sales by the U.S. Mint are set for the best month since April, when the metal plunged into a bear market.

Global mints are manufacturing as fast as they can after a 28 percent drop in gold prices last year, the biggest slump since 1981, attracted buyers of physical metal. The demand gains helped bullion rally for five straight weeks, the longest streak since September 2012. That won’t be enough to stem the metal’s slump according to Morgan Stanley, while Goldman Sachs Group Inc. predicts bullion will “grind lower” over 2014.

“The long-term physical buyers see these price drops as opportunities to accumulate more assets,” said Michael Haynes, the chief executive officer of American Precious Metals Exchange, an online bullion dealer. “We have witnessed some top selling days in the past few weeks.”

Gold futures in New York climbed 5.2 percent this month to $1,264.50 an ounce, heading for the first gain since August. The Standard & Poor’s GSCI Spot Index of 24 raw materials slid 1.2 percent, while the MSCI All-Country World index of equities dropped 2.9 percent. The Bloomberg Dollar Spot Index, a gauge against 10 major trading partners, advanced 0.7 percent.

Prices Rebound

Prices rebounded 7.2 percent since reaching a 34-month low in June as physical buying rose. The Shanghai Gold Exchange, China’s largest bullion bourse, delivered 2,197 metric tons to customers in 2013, compared with 1,139 tons in 2012, it said Jan. 15. The Asian country toppedIndia as the world’s top buyer last year as demand probably reached a record, the World Gold Council estimates.

The U.K.’s Royal Mint, which traces its history back more than 1,000 years, ran out of 2014 Sovereign gold coins because of “exceptional demand,” it said in a statement on Jan. 8. Coins weren’t available to customers until six days later when inventories were replenished. Sales by the Perth Mint, which also has workers producing coins in three shifts a day, will probably beat last year’s record, Ron Currie, the marketing director, said Jan. 20.

Goldman, Morgan

Bullion tumbled in 2013 after some investors lost faith in the metal as a store of value, snapping 12 straight years of gains. Holdings through exchange-traded products fell 33 percent in the past 12 months, erasing $69.1 billion from the value of the funds, data compiled by Bloomberg show. Prices also fell as U.S. equities rallied and inflation remained low.

Goldman expects bullion to fall to $1,050 in the next 12 months as the Federal Reserve reduces monetary stimulus, analysts led by Jeffrey Currie, the bank’s head of commodities research, said in a report Jan. 12. Precious metals are Morgan Stanley’s “least preferred” commodities, and physical demand won’t be enough to buoy prices, analysts Adam Longson, Bennett Meier and Peter Richardson said in a Jan. 17 report. The bank cut its 2014 target 12 percent to $1,160 on Jan. 22.

“Prices are likely to drop further as global economic conditions are stabilizing and tapering worries continue,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $110 billion of assets. “There is no doubt that physical demand has improved, but it will not be enough to support prices.”

Coin Sales

The U.S. Mint, the world’s largest, sold 89,500 ounces so far this month. The Austrian mint that makes Philharmonic coins, saw sales jump 36 percent last year and expects “good business” for the next couple of months, Andrea Lang, the marketing and sales director of Austria’s Muenze Oesterreich AG, said in an e-mail.

“The market is very busy,” Lang said. “We can’t meet the demand, even if we work overtime.”

The price for the Austrian mint’s 1-ounce Philharmonic gold coin slumped 27 percent last year, according to data from the Certified Coin Exchange.

“It’s been a very bad year for gold,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. “People who bought coins have lost value, but they are not looking at short-term gains, and hope springs eternal.”   By Debarati Roy

BBC News - Argentina to ease foreign exchange controls after peso slump

Argentina is to relax its strict foreign exchange controls, a day after the peso suffered its steepest daily decline in 12 years.

The economy has grown during Cristina Fernandez de Kirchner's presidency, but inflation has soared

Cabinet chief Jorge Capitanich said the country would reduce the tax rate on dollar purchases and allow the purchase of dollars for savings accounts.

The measures would take effect from Monday, he said.

On Thursday, the peso fell 11% against the dollar, its steepest fall since the country's 2002 financial crisis.

The central bank had been acting to support the waning currency amid a loss of investor confidence in the country. But the bank abandoned this policy on Thursday, sparking the peso's fall.

Despite efforts to support the economy, inflation has soared and many analysts expect it to reach about 30% this year.

That erodes confidence in the peso, prompting investors to put their money into US dollars rather than the sinking domestic currency.

Mr Capitanich said the government would reduce the tax rate on dollar purchases to 20% from the current 35%.

He said: "This decision reflects the government's belief that in the context of a floating exchange rate, the price of the currency - that is, the dollar - has reached an acceptable level for the objectives of economic policy."

BBC economics correspondent Andrew Walker said: "Argentina seems to be moving towards a more flexible exchange rate system, which could mean further weakness for the peso.

"That would help the country's competitiveness but the danger is that it could aggravate what is already a serous inflation problem."

Restrictions

Under the presidency of Cristina Fernandez de Kirchner, Argentina has introduced a number of restrictions on transactions with foreign currency.

This week, it introduced new restrictions on online shopping as part of efforts to stop foreign currency reserves from falling any further.

Anyone buying items through international websites must sign a declaration and produce it at a customs office, where the packages have to be collected.

The government now limits tax-free purchases to two a year.

Argentina's reserves of hard currency dropped by 30% last year, making support for the peso increasingly unaffordable.

In 2002, millions of Argentines saw their incomes and living standards collapse amid a crisis that included a government default on international debts and 41% inflation.

BBC News - China and UK trade at 'record high'

Bilateral trade between China and the United Kingdom hit a "record high" in 2013, according to the Chinese ambassador to the UK, Liu Xiaoming.

The UK has been looking to foster closer trade ties with China

The state-owned Xinhua news agency quoted Mr Liu as saying that bi-lateral trade between the two surpassed $70bn (£43bn) last year.

He said the UK's exports to China grew more than other EU countries.

The UK has been pushing to boost trade ties with Beijing in an attempt to tap into China's domestic market.

Last year, British Prime Minister David Cameron visited the world's second-largest economy to foster closer trade ties.

He was accompanied by more than 100 British business people on the three-day visit - his second to the country.

"The two countries' leaders reached a broad consensus on pushing forward bilateral relationship and expanding co-operation," said Stephen Perry, chairman of the 48 Group Club, an independent business network that looks to promote ties between China and the UK.

"China and the UK working together will benefit our people and contribute to global peace and development," Mr Perry was quoted as saying by Xinhua.

Open economy

Meanwhile, Chinese firms have been keen to invest in the UK as they look to expand their global reach.

Among the Chinese companies that have announced plans to invest in the UK are Dalian Wanda Group, which has said it will spend £1bn to buy a British yacht maker and develop a hotel property in London.

Network equipment maker Huawei has said it will invest £1.3bn in expanding its UK operations.

The UK has welcomed Huawei's increased investment and expansion despite the firm facing security concerns in other economies such as the US and Australia.

Meanwhile, Beijing Construction Engineering Group (BCEG) will be part of a group investing £800m in Manchester Airport to develop its surrounding business.

Britain is among the top 10 nations globally for outbound Chinese investment and attracts more than double the investment of any other nation in Europe.

Mr Perry said: "The UK can be the most profitable destination in the Western world for Chinese outward investment in infrastructure, real estate, energy and transportation".

Bloomberg News - Investor Animal Spirits Spread to Companies Worldwide

Companies around the world are starting to share the exuberance that inspired investors last year.

As executives gather in Davos, Switzerland, this week for the World Economic Forum’s annual meeting, business confidence is rising, with a weekly gauge compiled by Moody’s Analytics Inc. at its highest level since the survey began in 2003.

Mergers and acquisitions are surging, with $130 billion in takeover offers already announced this year. And enterprises from Microsoft Corp. (MSFT) toVolkswagen AG (VOW) are readying plans to step up capital spending after companies have squirreled away a record amount of cash to protect against a new financial crisis.

“The animal spirits are coming back,” said Mark Zandi, chief economist for New York-based Moody’s. “This is going to be a good year” for capital expenditures and hiring.

Behind the projected upturn: increased confidence in the durability of expansion following faster U.S. and global growth late last year, the need to replace aging and out-of-date equipment, and a waning of what Zandi calls “existential fears,” including concerns about a breakup of the euro region.

A comeback is critical for the global economy and financial markets. Strategists at Goldman Sachs Group Inc. and Credit Suisse Group AG are forecasting the fastest worldwide growth since 2011 and continued gains for equities -- predicated partly on optimism spreading from investors to companies.

Record High

The MSCI World Index is up 19 percent from a year ago. Sales of high-yield, high-risk bonds set a record in 2013, and the average yield investors demand to hold bonds from Greece, Ireland, Italy, Portugal and Spain over benchmark German securities fell this month to the lowest since April 2010, Bank of America Merrill Lynch bond indexes show.

“You’d have to say that values are more stretched than they were a year ago,” former U.S. Treasury Secretary Lawrence Summers told Bloomberg Television on Jan. 6. The Davos veteran warns major economies are threatened by “secular stagnation” that even zero-percentinterest rates can’t solve.

Investors may need to see more demand from consumers and companies soon if they’re going to become even more positive, according to Adam Posen, president of the Peterson Institute for International Economics in Washington.

“Continued appreciation of equities in the U.S. and Europe would require the handoff,” said the former U.K. policy maker, who is attending this week’s economic forum. “You need something more.”

Sense of Dread

Since the collapse of Lehman Brothers Holdings Inc. in September 2008, the annual get-togethers of executives and government policy makers in Davos frequently have been dominated by a sense of dread about the stability of the world financial system. A global recession and doubts about the euro’s survival only augmented the stress.

While last year’s forum was calmer, it still was dogged by worries about Europe’s economic slump, a possible hard landing for China’s economy, questions about Japanese stimulus plans and wrangling between President Barack Obama and congressional Republicans over raising the federal debt limit.

“What is fresh is we are now in less of a crisis mood,” said Ernesto Zedillo, former president of Mexico and now a professor at Yale University in New Haven, Connecticut, who’s attending the forum. “People were extremely fearful a year ago. Now we seem to be in better shape but with significant fragilities.”

Waning Anxieties

The question is whether waning anxieties will stir what the late economist John Maynard Keynescalled “animal spirits,” leading executives to shed their conservatism and step up investment.

At the end of 2012, large global businesses, excluding financial, sat on $4.5 trillion in cash, 73 percent more than in 2006, according to BofA Merrill Lynch. The piles totaled $1.4 trillion in the U.S., $1.1 trillion in Europe and $613 billion in Japan.

So why spend now? One reason is to ride the acceleration in global growth. The International Monetary Fund will raise its forecast tomorrow from the 3.6 percent it predicted in October, Managing Director Christine Lagarde told reporters Jan. 7. Credit Suisse and Goldman Sachs economists are penciling in expansion of 3.7 percent this year after 2.9 percent last year.

Companies already are taking note. JPMorgan Chase & Co. reports its global index of sentiment among manufacturing purchasing managers was the highest last month since April 2011.

Growing Optimism

The growing optimism is reflected in the merger market. Charter Communications Inc. (CHTR)said last week it is seeking to purchase Time Warner Cable Inc. (TWC) for about $61.3 billion. Suntory Holdings Ltd. announced it will buy spirits maker Beam Inc. (BEAM) for about $16 billion. Both deals include debt.

The need to replace out-of-date equipment is another reason to spend now. The average age of capital stock has been pushed close to a record at more than 12 years in Europe and almost 17, the highest since 1970, in the U.S., Credit Suisse estimates.

Companies also may have to start spending to get on board with breakthroughs such as greater broadband connectivity and big data, according to Laura Tyson, a professor at the University of California at Berkeley’s Haas School of Business.

“There are technological reasons, as well as animal spirits, for why we can be optimistic there will be a pick up,” said Tyson, a former chairman of the White House Council of Economic Advisers.

Businesses Underinvesting

Investors are agitating for companies to loosen their purse strings. A record number of fund managers polled last month by BofA Merrill Lynch said businesses are underinvesting, and 55 percent -- the most since December 2005 -- want the cash to be used for capital expenditures.

In the U.S., the shift already may be under way. Orders for nonmilitary capital equipment, excluding aircraft, increased 4.1 percent (CGNOXAI%) in November, the most in 10 months, according to data from the Commerce Department.

While the expiration of a tax credit at the end of last year may have influenced some of that buying, companies are set to continue their spending in 2014. Redmond, Washington-based Microsoft plans to more than double investment to $6.5 billion in the fiscal year that ends in June compared with two years ago, mostly on data centers and networking equipment.

Rising Wealth

A sharp increase in wealth has helped convince executives the expansion has momentum, saidVincent Reinhart, chief U.S. economist for Morgan Stanley in New York. Household net worth increased by $6.3 trillion in the first three quarters of 2013 to $77.3 trillion, thanks to rising equity and home prices.

Andrew Lapthorne, global head of quantitative strategy at Societe Generale SA in London, sounds a cautionary note. He sees less room than rivals for U.S. companies to spend because capital expenditures already have outpaced cash-flow growth for three years and, at about 7 percent of sales, are higher than before the financial crisis. Total debt also is 35 percent more than in 2008-2009.

“The problem is not a lack of desire to invest, but anemic demand reflected in very low sales growth,” he said in a Jan. 16 report to clients. “If the demand isn’t there, why invest?”

Almost a year after its recession ended -- and even as banks prove reluctant to lend -- Europe will enjoy a run-up in corporate investment, according to Erik Nielsen, chief global economist in London at UniCredit SpA.

Manufacturing Boost

A European Commission survey in November found that manufacturers plan to boost spending by 3 percent this year after cutting it that much in 2013. Volkswagen, Europe’s largest automaker, said that month it intends to invest 84.2 billion euros ($114 billion) through 2018 on developing new vehicles and upgrading factories.

“European companies have been sitting on their hands, waiting to see demand,” Nielsen said. “Capex during this year will kick start.” He anticipates economic growth of 1.5 percent in the euro area amid a 1.9 percent gain in fixed investment, which would be the most since 2007.

In Japan, the onus is on encouraging businesses to boost wages as inflation finally begins to take root in the world’s third largest economy.

“What we want is for wages to rise more than prices,” Prime Minister Shinzo Abe said last month in an interview. “We want to enter a virtuous cycle” where economic growth propels corporate profits, employers raise compensation and workers spend more, he said. Abe speaks in Davos on Jan. 22.

Higher Salaries

Although companies, including Nomura Holdings Inc. and Daiwa Securities Group Inc., say they will increase salaries for some workers, Bloomberg News surveys show that consumer prices in Japan still will climb five times faster than wage gains in the year starting April.

If corporations worldwide do beef up expenditures, it will boost the capacity of the global economy to expand in the longer-run, perhaps damping the concerns of Summers and others that industrial nations are stuck in a slow-growth trap.

In a sign that such pessimism may be misplaced, Emerson Electric Co. (EMR) Chief Executive Officer David Farr said he’s going on offense this year to boost sales after reining in spending. Emerson, a St. Louis-based maker of compressors and automation equipment, estimates its global fixed investment will rise as much as 4 percent after increasing 1 percent in 2013.

After two and a half years of “keeping things really tight,” it’s time “to pivot and to increase our investments,” Farr said in a November conference call with analysts. “We believe the wind is starting to shift to our back.”

To contact the reporters on this story: Simon Kennedy in London 

BBC News - IMF head Christine Lagarde warns of deflation risks

The head of the International Monetary Fund has warned about the risks to global economic recovery of deflation.

Christine Lagarde was speaking at the National Press Club, in Washington

Christine Lagarde said that "optimism is in the air" about growth, but the recovery is still "fragile".

"If inflation is the genie, then deflation is the ogre that must be fought decisively," she said in a speech in Washington.

Earlier, the World Bank said that the global economy was at a "turning point" but "remained vulnerable".

"We see rising risks of deflation, which could prove disastrous for the recovery," Ms Lagarde said at the National Press.

There has, for example, been growing debate about whether deflation might take hold in the eurozone, where inflation remains persistently below the European Central Bank's target.

Deflation can reduce personal consumption as people wait for prices to fall further, and discourage investment because it can raise the real cost of borrowing.

Ms Lagarde also warned about the volatility that could accompany the US Federal Reserve's gradual withdrawal of monetary stimulus.

"Overall, the direction is positive, but global growth is still too low, too fragile, and too uneven," she said.

Also on Wednesday, the World Bank said in its annual report that richer countries appeared to be "finally turning a corner" after the financial crisis.

That is expected to support stronger growth in developing economies.

But it warned growth prospects "remained vulnerable" to the impact of the withdrawal of economic stimulus measures in the US.

'Crisis risks'

The US Federal Reserve has already begun to wind down its monthly bond-buying programme, previously set at $85bn (£52bn) a month.

There is concern this could push up global interest rates, which could affect the flow of money in and out of developing countries and lead to more volatile international financial markets.

The World Bank warned that some developing countries "could face crisis risks" if the unwinding of stimulus measures was accompanied by market volatility.

"Growth appears to be strengthening in both high-income and developing countries, but downside risks continue to threaten the global economic recovery," said World Bank group president Jim Yong Kim.

"The performance of advanced economies is gaining momentum, and this should support stronger growth in developing countries in the months ahead. Still, to accelerate poverty reduction, developing nations will need to adopt structural reforms that promote job creation, strengthen financial systems, and shore up social safety nets."

The bank forecasts that global GDP will grow by 3.2% this year, up from 2.4% in 2013, with much of the pick-up coming from developed economies.

Developing nations will grow by 5.3% this year, up from 4.8% in 2013.

In an interview with BBC economics correspondent Andrew Walker, World Bank economist Andrew Burns acknowledged that Brazil, Turkey, India and Indonesia were among the countries that could be vulnerable to the impact of US stimulus withdrawal.

However he also noted that the first concrete steps taken by the Federal Reserve to cut back its programme of buying financial assets last month did not severely disturb the markets.

Reuters News - Lawmakers unveil $1.1 trillion spending bill

The U.S. Capitol dome is pictured in the pre-dawn darkness in this general view taken in Washington, October 18, 2013.

CREDIT: REUTERS/JONATHAN ERNST

(Reuters) - Negotiators in the U.S. Congress on Monday unveiled a $1.1 trillion spending bill that aims to prevent another government shutdown while boosting funding levels slightly for military and domestic programs - but not for "Obamacare" health reforms.

With a deadline looming at midnight Wednesday for new spending authority, lawmakers will still need a three-day stop-gap funding extension to ensure enough time for passage of the spending bill this week.

The measure eases across-the-board spending cuts by providing an extra $45 billion for military and domestic discretionary programs for fiscal 2014, to a total of $1.012 trillion. It also provides an additional $85.2 billion for Afghanistan war funding that is typically handled off-budget.

The spending measure fills in the details of a budget agreement passed in December in the aftermath of a 16-day shutdown of many government agencies in October. The shutdown was prompted largely by disputes over funding for "Obamacare" health insurance reforms.

Although many programs will get a slight increase over 2013 levels and avoid steep cuts previously slated for this year, the proposed bill does not provide any increase for implementation of the Affordable Care Act, President Barack Obama's signature healthcare reform law.

According to a House Republican summary, a public health fund will be reduced by $1 billion to prevent Health and Human Services Secretary Kathleen Sebelius from "raiding" these funds to spend on Obamacare insurance exchanges.

The chairs of the Senate and House of Representatives Appropriations Committees said in a joint statement that the deal will eliminate the economic instability caused by Congress' recent funding battles.

"As with any compromise, not everyone will like everything in this bill, but in this divided government a critical bill such as this simply cannot reflect the wants of only one party," Democratic Senator Barbara Mikulski of Maryland and Republican Representative Harold Rogers of Kentucky said in a statement.

White House Budget Director Sylvia Mathews Burwell said the measure will help fund critical investments in education and infrastructure.

"This legislation adheres to the funding levels in the budget agreement enacted in December, unwinds some of the damaging cuts caused by sequestration," she said in a statement.

The military avoids about $22 billion in the across-the-board cuts, with total non-war spending of about $520.5 billion under the bill, while agencies focused on domestic programs will get $491.8 billion, representing an increase of about $22 billion over sequester levels.

But some controversial budget items took a hit. The spending measure provides no funds for high-speed rail projects, and it again denied a funding transfer needed to pay for critical reforms to the International Monetary Fund.

MILITARY PENSION FIX

But both Republicans and Democrats touted a provision in the bill that reverses planned military pension cuts for disabled veterans, a controversial part of the December budget deal that helped pay for about $6 billion in new spending. Military retirees of working age were to see smaller cost-of-living increases in their pensions starting in 2015 but it was later discovered that the change was inadvertently applied to disabled veterans and survivors of deceased veterans as well.

While the spending bill will reverse the cuts for disabled veterans and survivors, many Republicans in Congress still want to cancel the cuts for all retired military service members.

Negotiations on the measure bogged down as lawmakers attempted to attach policy provisions on issues ranging from restricting abortions to curtailing regulation of carbon emissions. Many of these were successfully fought off, including new abortion provisions, Mikulski told reporters.

Democratic aides said the bill includes no new provisions prohibiting regulations on greenhouse gas emissions, nor forestry and stream management. They also prevented new gun-rights language from inclusion.

But Republicans did get a policy provision into the measure that prohibits funding of the Obama administration's "light bulb standard," which prohibits the manufacture of incandescent light bulbs in favor of newer technologies that reduce energy consumption.

Passage of the measure would leave just one more significant fiscal policy hurdle during the current fiscal year which ends on September 30 - an increase in the federal debt limit. This will likely be needed by March or April to avoid a default on the Treasury's debt and the resulting market turmoil.

(Editing by Lisa Shumaker and Eric Walsh)

Reuters News - UK confirms debt pledge ahead of Scottish referendum

The Saltire (R) and Union Flag fly together in a street before a debate in the Scottish Parliament on ‘Scotland’s future,’ in Edinburgh, Scotland September 18, 2013.

CREDIT: REUTERS/RUSSELL CHEYNE

(Reuters) - The British government confirmed on Monday that it will take responsibility for all British government debt should Scotland vote for independence in September, a move it hopes will avoid jitters in bond markets ahead of the referendum.

"In the event of Scottish independence from the United Kingdom, the continuing UK government would in all circumstances honor the contractual terms of the debt issued by the UK government," the Treasury said in a statement.

An independent Scotland would be responsible for "a fair and proportionate share" of Britain's liabilities but a share of the outstanding debt would not be transferred to Scotland, it said, adding the terms of repayment would be subject to negotiation.

Britain's net debt stood at nearly 1.2 trillion pounds at the end of the 2012-13 fiscal year.

(Reporting by William Schomberg, Editing by Belinda Goldsmith)

Bloomberg News - Greece Dreams of Bond Sale in Rally From Ireland to Portugal

Europe’s financial markets are picking up where they left off 2013, extending a rally in bonds and stocks that’s making the region’s sovereign debt crisis little more than a fading memory.

Ireland sold bonds this week, returning to financial markets after completing a three-year bailout program. Portugal -- another aid recipient -- is holding a sale today. Banks in Spain and other periphery countries have never been able to borrow as cheaply as they can now. The Stoxx Europe 600 Index of stocks closed at its highest level since May 2008 yesterday and the euro is about its strongest since 2011 against the dollar.

Such is the confidence in Europe thatGreece, which sparked Europe’s sovereign woes in 2009 and required two bailouts, said yesterday it may sell bonds this year. That would mark a turnaround in the region after nations were shut out of debt markets, triggering the collapse of governments and causing unemployment to top 12 percent. It took a pledge from European Central Bank President Mario Draghi in July 2012 to “do whatever it takes” to keep the currency bloc from breaking apart.

“The market is feeling very confident,” said Daniel Loughney, a fixed-income money manager inLondon at AllianceBernstein Holding LP, which oversees $446 billion. “They know the ECB will want to support them. It’s in everyone’s interest not to upset the apple cart.”

BlackRock, Templeton

Last year’s rally, led by a 47 percent return in Greek bonds, rewarded investors from BlackRock Inc. to Franklin Templeton Investors who took a chance on the region’s financial assets. Sovereign debt yields in the euro area fell to 2.55 percent on average this week, lower even than before the global financial crisis, Bank of America Merrill Lynch indexes show.

That’s a reversal from late 2011, when borrowing costs soared to almost 10 percent as governments sought international bailouts because they lost access to debt markets. The crisis had worldwide repercussions, with MF Global Holdings Ltd., the New York firm led by Jon Corzine, collapsing when the extent of its bets on European debt became known.

Investor appetite for European government bonds is returning as the region’s most-indebted peripheral economies show signs of recovery. Ireland, which had its fastest growth since 2011 in the third quarter, raised 3.75 billion euros ($5.1 billion) from a 10-year bond sale this week as it came back to financial markets after exiting its bailout program.

Falling Yields

Yields on Ireland’s benchmark 10-year bonds fell as low as 3.25 percent on Jan. 7, the least since January 2006. The extra yield investors receive for holding the securities instead of benchmark German bunds narrowed to 1.35 percentage points from a high of more than 11.5 percentage points on July 2011.

Portugal is now trying to regain full access to debt markets, with the end of its own 78 billion-euro rescue program from the European Union and International Monetary Fund approaching in June. The nation will sell additional 4.75 percent securities maturing in June 2019 priced to yield 330 basis points more than the mid-swap rate, said a person familiar with the arrangement, who asked not to be identified because they’re not authorized to speak about it. That’s down from initial price talk of about 340 basis points.

The rate on 4.45 percent Portuguese securities due in June 2018 was at 3.99 percent at 12:49 p.m. London time today, after dropping to 3.91 percent yesterday, the lowest for a benchmark five-year note since 2010.

Sluggish Growth

Spain auctioned five-year notes today to yield 2.382 percent, the lowest on record. The nation’stwo-year note yields fell below 1 percent for the first time on record in secondary-market trading today.

“We’ve seen a meaningful tightening in the periphery and it feels as though that trade still has further to run,” said Mark Dowding, a money manager at London-based BlueBay Asset Management LLP, which oversees $56 billion including Portuguese, Spanish and Italian bonds. “Generally we are playing the periphery from the long-side.” A long position is a bet an asset price will rise.

Europe isn’t in the clear yet. The euro zone’s economy will probably grow 1 percent this year, compared with 2.6 percent for the U.S., according to surveys of analysts by Bloomberg News. The jobless rate has climbed to about 12 percent from 7.3 percent in 2008.

‘Risk Perception’

“In the last 24 months there has been a progressive reduction in the perception of risk among investors and we are gradually moving from fear to greed,” said Jacopo Ceccatelli, a London-based partner who manages 2.2 billion euros at financial advisory and asset management firm JCI Capital. “The reduction in the risk perception, and this sort of market euphoria, is leading to a re-rating of sectors and countries most penalized during the sovereign debt crisis.”

The euro, now the currency for 18 nations, rose against all but one of its 16 major counterparts last year as the region’s economy emerged from its longest recession on record. It rose 0.3 percent to $1.3613 today, after touching a two-year high of $1.3893 on Dec. 27.

As investor confidence builds, corporate credit risk in the euro region is falling. The Markit iTraxx Europe index of credit-default swaps dropped this week to the lowest since January 2010, while the Markit iTraxx Crossover Index of swaps on high-yield companies declined to the lowest since 2007.

Borrowing Costs

In the bond market, banks are paying less to borrow than industrial companies, with average yields about 4.5 basis points lower than the broader market. That’s down from a premium of as much as 70 basis points in November 2011, Bloomberg data show.

The average yield investors demand to hold bonds from financial companies in Spain and other nations from Europe’s periphery dropped nine basis points in the past week to a record 2.62 percent, based on Bank of America Merrill Lynch indexes.

“We’ve seen increased interest in Europe out of the U.S. as people play the recovery story in Europe, and the European periphery in particular,” said Michael Hampden-Turner, an analyst at Citigroup Inc. in London. “Everybody’s pretty long and risk appetite remains strong.”

Europe’s lenders are among those benefiting from the rally in sovereign bonds, through their ownership of the securities. Banks in the Stoxx 600 index jumped 2.9 percent on Jan. 7, the most since July, as Ireland returned to the market.

Spanish Banks

Spanish and Portuguese banks have posted some of the largest increases among European shares this year. Banco Popular Espanol SA rallied 23 percent through yesterday, the most in the Stoxx 600, and Lisbon’s Banco Espirito Santo SA jumped 16 percent. Bank of Ireland Plc climbed 15 percent. Among the 10 biggest winners in the Stoxx 600, five were banks, data compiled by Bloomberg show.

Italian banks, which bought government bonds with three-year loans they obtained from the ECB in 2011 and 2012, are the biggest holders of the country’s sovereign debt.

Banca Monte dei Paschi di Siena SpA, Italy’s biggest holder of Italian bonds relative to its tangible equity, climbed 6.3 percent this year. The Italian bailed-out bank holds 26 billion euros in government bonds, more than three times its tangible capital. UniCredit SpA has jumped 10 percent.

“There’s clearly a recovery trade going on,” said Robert Smalley, Global Financials Analyst and head of the credit desk analyst group at UBS AG in New York. “European banks have been operating a self-help policy in preparation for the asset quality review.”

Draghi’s Pledge

The availability of funding is giving companies with excessive debt loads more time to restructure. Leveraged loan issuance in Europe surged 44 percent last year, with companies borrowing 56 billion euros of the debt, the most since 2007, according to data compiled by Bloomberg.

Billionaires Bill Gates and George Soros have bought stakes in Fomento de Construcciones y Contratas SA, the money-losing Spanish builder that said in November it has about 6 billion euros of debt. The company said yesterday that 95 percent of its lenders agreed to extend its loans for two months as it works to refinance the debt.

The rally’s roots can be traced to July 26, 2012, when Draghi pledged to do “whatever it takes” to protect the region from the unfolding debt crisis. The ECB went on to cut its benchmark interest rate to a record 0.25 percent in November to support the recovery. Policy makers held it at that level today, matching the forecasts of all 51 analysts surveyed by Bloomberg.

Greek Profit

Buying Greek bonds the day of Draghi’s comments would have earned investors a 370 percent return, based on the Bloomberg Greece Sovereign Bond Index. (BGRE) Ireland’s earned 27 percent and Portugal’s 42 percent, while U.S. Treasuries lost 3.9 percent.

BlackRock, the world’s biggest money manager, is betting on more gains. The firm said last month it supported peripheral bonds with positions in Portugal, Slovenia, Ireland and Italy. Franklin Templeton is one of the biggest holders of Irish debt, according to data compiled by Bloomberg.

Buoyed by the recovery in debt markets and with his government predicting Greece will return to growth this year for the first time since 2007, Greek Finance Minister Yannis Stournaras said yesterday the nation may sell five-year notes in the second half of the year.

The step would mark Greece’s return to bond markets since being shut out in early 2010 following alarm about the size of its budget deficit. Yields on the nation’s 10-year debt fell as low as 7.63 percent yesterday, the least since May 2010, and down from a peak of more than 44 percent in March 2012.

“People are generally upbeat and are looking toward further spread tightening,” said AllianceBernstein’s Loughney. “Fundamentally there are still significant issues but it looks as though the ECB’s friendly stance will continue for the foreseeable future.”

By Neal Armstrong and David Goodman