Bloomberg News

Spanish, Italian Bonds Rise as ECB Offers Loans; Bunds Decline

December 20, 2011

Dec. 20 (Bloomberg) -- Spanish government notes rose for an eighth day and Italian bonds gained as the European Central Bank offered unlimited three-year loans to the region’s banks, boosting demand for higher-yielding assets.

German 10-year yields advanced as a report showed business confidence in Europe’s largest economy unexpectedly rose in December. Italian two-year note yields fell for a fourth day, touching a seven-week low, on speculation banks bought the nation’s debt to use as collateral at the ECB’s long-term refinancing operation. Spain sold more than its maximum target of bills today as borrowing costs fell. Greece issued 1 billion euros ($1.3 billion) of 91-day securities.

The ECB’s longer-term refinancing operation “appears to have spurred demand for short-dated Spanish and Italian paper,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “There’s been a bit of a grab of collateral as investors set up for it. The market has been pricing in the operation since before the ECB meeting. This has boosted both core markets and the periphery.”

Italian two-year note yields dropped 20 basis points, or 0.2 percentage point, to 4.94 percent at 3:47 p.m. London time, after reaching 4.91 percent, the least since Oct. 31. The 2.25 percent security due in November 2013 rose 0.33, or 3.3 euros per 1,000-euro face amount, to 95.385. Italy’s 10-year bond yield fell 27 basis points to 6.57 percent.

Spain’s two-year note yields slid three basis points to 3.34 percent.

ECB Loans

Italian and Spanish two-year rates have slipped more than one percentage point since ECB President Mario Draghi announced the unprecedented loans on Dec. 8, as investors bet that banks may use the cash to buy government debt.

The three-year loan operation takes place today and the results will be announced tomorrow. Economists expect the ECB to lend 293 billion euros to banks in tomorrow’s tender, according to the median of 14 forecasts in a Bloomberg News survey conducted before today’s allotments.

Lenders may have taken as much as 550 billion euros, Royal Bank of Scotland Group Plc analysts, including Ian Smillie, wrote in a report dated yesterday. ECB Vice President Vitor Constancio yesterday predicted “significant” demand for the loans.

Spain’s 10-year bonds rose for a sixth day, pushing the yield down 11 basis points to 5.07 percent, the least since Oct. 12.

Business Climate

The nation’s central bank regulators met with treasurers on Dec. 15 to encourage them to use the ECB’s new facility, telling them that the more banks use the facility, the less chance there is of stigma for taking the funds, said two people familiar with a meeting held last week. A spokesman for the Bank of Spain declined to comment in an emailed response.

Ten-year bund yields rose eight basis points to 1.96 percent. Two-year note yields were little changed at 0.21 percent, after dropping to 0.202 percent, the lowest since at least 1990 when Bloomberg began collecting the data.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, rose to 107.2 from 106.6 in November, the Munich-based institute said today. Economists expected a drop to 106, the median forecast of 36 economists in a Bloomberg News survey showed.

German two-year note yields have fallen 65 basis points this year, while 10-year rates have dropped more than 1 percentage point as the euro-area’s sovereign-debt crisis worsened, stoking demand for the region’s benchmark securities.

Spanish Sale

The Bundesbank forecast yesterday that German economic growth will slow to 0.6 percent in 2012 from 3 percent this year, before recovering to 1.8 percent in 2013.

Spain sold 5.64 billion euros of three- and six-month bills, the central bank said, compared with a maximum target of 4.5 billion euros the Treasury had set for the sale.

The average yield on the three-month debt dropped to 1.735 percent, compared with 5.110 percent when the securities were last issued on Nov. 22, and the average six-month yield fell to 2.435 percent from 5.227 percent last month.

Europe bolstered its anti-crisis arsenal yesterday, channeling 150 billion euros to the International Monetary Fund.

Four countries not using the single currency also pledged to add to the IMF war chest, while Britain refused to commit, preventing officials from reaching the 200 billion-euro target to ease the euro area’s home-grown debt burdens. The U.K. will “define its contribution” in early 2012, euro finance ministers said in a statement after a conference call yesterday.

German bonds have handed investors 2.8 percent this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, boosting year-to- date returns to 9.4 percent. Spanish securities have gained 6.1 percent this year, while Greek debt has lost more than 63 percent, the indexes show.

--With assistance from Gabi Thesing in London. Editor: Matthew Brown

To contact the reporters on this story: Emma Charlton in London at echarlton1@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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