Bloomberg News

Spanish, Italian Bonds Rise on Speculation ECB to Purchase Debt

July 27, 2012

Spanish and Italian bonds advanced for a third day on speculation euro-area policy makers will sanction purchases of government debt to ease the debt crisis.

Italy’s 10-year yields fell below 6 percent for the first time in a week after Le Monde reported the European Central Bank was preparing to buy securities. German bunds fell after Finance Minister Wolfgang Schaeuble said he welcomed comments from ECB President Mario Draghi yesterday that officials would do what is needed to rein in borrowing costs. German Chancellor Angela Merkel and French President Francois Hollande said today they would do everything necessary to protect the euro.

“Draghi will have to follow up on his statement from yesterday and the market thinks that will be with bond buying,” said Anders Moeller Lumholtz, an analyst at Danske Bank A/S (DANSKE) in Copenhagen. “The market is still expecting a response from the ECB,” and this is pushing down Spanish and Italian bond yields, he said.

The Spanish 10-year yield fell 18 basis points, or 0.18 percentage point, to 6.74 percent at 4:39 p.m. London time, after surging to a euro-era record 7.751 percent on July 25. The 5.85 percent bond due January 2022 rose 1.2, or 12 euros per 1,000-euro ($1,236) face amount, to 93.825.

Italy’s 10-year yield fell nine basis points to 5.96 percent, declining below the level of 6 percent for the first time since July 20.

‘Quick’ Implementation

Europe’s two largest nations are “bound by the deepest duty” to keep the euro-area intact, Merkel and Hollande said in a joint statement after a telephone conference today. The two sought “quick” implementation of resolutions made at a June 28- 29 European Union summit, they said.

“We are at a point now where the market needs to see some hard resources put to the countries that need them,” said Harvinder Sian, a fixed-income strategist at Royal Bank of Scotland Group Plc in London. “There will be disappointment if we don’t get some progress or some further color over the weekend.”

The ECB is under pressure to help bring down borrowing costs for Spain and Italy after yields on Spain’s two-, five-, 10- and 30-year government securities surged to euro-era highs this week. Policy makers next meet on Aug. 2.

“To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate,” Draghi said in a speech in London yesterday. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.”

German Yields

Schaeuble said in an e-mailed statement he welcomed the comments and “in the first place” euro-area states must make “necessary” national reform steps to win help.

Germany’s 10-year yield rose seven basis points to 1.39 percent, after climbing to 1.41 percent, the most since July 5. The yield has increased 23 basis points this week. The two-year note yield increased two basis points to minus 0.029 percent.

“So far Draghi’s comments have been supportive for the market,” said Elaine Lin, a strategist at Morgan Stanley in London. “He is hinting toward a restarting of the bond-buying program, which will give some kind of temporary relief, but it isn’t a long-term solution.”

The ECB supported the bond market in previous periods of turmoil by buying securities in the secondary market and by offering unlimited three-year loans under its longer-term refinancing operations, some of which banks reinvested in sovereign debt.

Record Low

At its previous policy meeting on July 5, policy makers cut the benchmark rate to a record low of 0.75 percent and reduced the rate on overnight deposits to zero.

Irish bonds rose for a second day after the nation returned to long-term debt markets for the first time in almost two years yesterday, selling 4.19 billion euros of new securities and exchanging some short-maturity notes for longer-term debt.

The yield on the nation’s 5 percent bond maturing in October 2020 fell 16 basis points to 6.18 percent, after declining six basis points yesterday.

Volatility on Irish bonds was the highest in euro-area markets today, followed by Spain and Germany, according to measures of 10-year or similar-maturity debt, the spread between two-year and 10-year securities and credit-default swaps.

German debt returned 3.7 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 6.2 percent, while Italy’s earned 7.4 percent.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

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


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