Bloomberg News

French, Belgian Bonds Rally as EU Debt Measures Stoke Optimism

December 09, 2011

Dec. 9 (Bloomberg) -- French and Belgian bonds rose, outperforming benchmark German bunds, as investors digested a fifth package of crisis-fighting agreements devised by European leaders to end the region’s debt crisis.

Italian and Spanish notes advanced as the European Central Bank was said to buy the securities. The nations’ longer-dated debt also climbed, reversing an earlier drop, before auctions next week. German bunds declined for the first time in four days after European leaders said they would channel 200 billion euros ($267 billion) into the International Monetary Fund and tighten anti-deficit rules.

“On the positive side, you have the pledge to provide financing for the IMF,” said Richard McGuire, a fixed-income strategist at Rabobank International in London. “If the ECB is intervening in the markets, perhaps that’s supporting this risk- on view. Some traction has been made but we’re long on rhetoric and still short on substance.”

French 10-year yields were nine basis points lower at 3.27 percent as of 3:34 p.m. London time. The 3.25 percent securities due October 2021 rose 0.765, or 7.65 euros per 1,000-euro face amount, to 99.87. Equivalent-maturity Belgian yields dropped 12 basis points to 4.55 percent.

German 10-year bund yields were 13 basis points higher at 2.12 percent as the Stoxx Europe 600 Index of shares advanced 1.2 percent and the euro strengthened 0.3 percent to $1.3376.

ECB President Mario Draghi welcomed the accord struck at all-night talks in Brussels, as the region’s leaders ventured into untested legal territory by plotting to anchor tougher budget rules in a separate euro-area treaty.

ESM Brought Forward

The lawmakers said they will aim to set up the permanent rescue fund, known as the European Stability Mechanism, in July 2012, a year ahead of schedule. It’s 19 months since euro leaders forged their first plan to contain the debt turmoil that started in Greece more than two years ago.

In addition to purchases of Spanish and Italian debt, the ECB was also said to buy Portuguese bonds today, according to two people with direct knowledge of the trades, who declined to be identified because the deals are private. A spokesman for the central bank in Frankfurt declined to comment.

Italy is due to sell bonds maturing in 2016 on Dec. 14 and Spain will auction securities due in 2016, 2020 and 2021 the following day. The European Financial Stability Facility bailout fund plans to raise as much as 2 billion euros over three months from its first sale of bills next week.

‘Overly Pessimistic’

Italian two-year yields were 24 basis points lower at 5.99 percent, while 10-year yields dropped 10 basis points to 6.36 percent. Spanish two-year rates declined 25 basis points to 4.66 percent. The nation’s 10-year yield slid eight basis points to 5.73 percent.

The rate on Portuguese two-year notes climbed 15 basis points to 17.09 percent.

Before the summit, “the market got overly pessimistic and it’s perhaps more positive than what was feared,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA in London. “The non-German triple As are outperforming and if we didn’t have supply pressure, I think you’d see the same for Spain and Italy.”

The difference in yield, or spread, between AAA rated French 10-year debt and German bunds narrowed 22 basis points to 112 basis points. The Austrian-German spread tightened 12 basis points to 108 basis points.

Volatility on German and Spanish debt was the highest among euro-area nations tracked by Bloomberg today, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. The difference between Germany’s two-year and 10-year yields moved 2.5 times the 90-day average, the gauge showed.

‘Not Convinced’

Italy has to sell 221 billion euros of bonds next year, according to Gianluca Ziglio, a fixed-income strategist at UBS AG in London.

The decline in German bunds today erase their advance for the week, with yields little changed versus the close on Dec. 2. The region’s leaders said today the ESM won’t get a banking license that would enable it to increase its firepower.

“I’m not convinced that there is enough here to calm the markets as we head into next year with a lot of supply,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. “The ECB will have to continue supporting the bonds.”

German bunds have handed investors a gain of 8.2 percent this year, while Italian debt made a loss of 7.6 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

--With assistance from Keith Jenkins and Anchalee Worrachate in London. Editors: Matthew Brown, Nicholas Reynolds

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

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


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