Italian and Spanish two-year notes jumped, outperforming the nations’ 10-year bonds, on speculation the European Central Bank will buy shorter-maturity debt to help quell the region’s financial turmoil.
Spain’s two-year yields completed the biggest weekly decline this year as reports showed euro-area manufacturing and services shrank less than economists forecast, and retail sales beat estimates. ECB President Mario Draghi said yesterday any bond purchases would focus “on the short end of the yield curve.” Spain’s Prime Minister Mariano Rajoy said he would consider asking the euro-area’s bailout funds to buy Spanish debt if it was for the best of the country. German bunds fell.
“The major positive takeaway was that the ECB will be allowed in the longer-term to purchase short-dated sovereign bonds, that is positive for them,” said Michael Markovic, a fixed-income strategist at Credit Suisse Group AG in Zurich. “We should see a curve steepening,” he said, referring to a situation where the difference between shorter and longer maturity yields widens.
Italy’s two-year yield dropped 61 basis points, or 0.61 percentage point, to 3.13 percent at 5 p.m. London time. The 4.25 percent bond due July 2014 climbed 1.11, or 11.10 euros per 1,000-euro ($1,239) face amount, to 102.095.
The nation’s 10-year yield fell 28 basis points to 6.05 percent. The extra yield investors demand to hold the securities over their two-year equivalents expanded to as much as 308 basis points, the most since March 8.
“There is a degree of thinking that maybe what Draghi was saying was not that negative,” said Achilleas Georgolopoulos, a fixed-income strategist at Lloyds Banking Group Plc in London. “He said if you need help, request it and the ECB will help you, if you meet the conditions.”
The yield on Spain’s two-year note dropped 88 basis points to 3.96 percent, extending this week’s decline to 135 basis points, the most since the period ending Dec. 2. The 10-year yield fell 32 basis points to 6.85 percent, below the 7 percent level that prompted bailouts of Greece, Ireland and Portugal.
“I will do what I always do, act in the best interest of Spaniards,” Rajoy said at a news conference in Madrid, when asked whether he was considering a request. He said he needed to see more details on what the ECB was planning in terms of bond buying and non-conventional measures before taking any decision on seeking support.
Spanish and Italian securities added to gains after members of German Chancellor Angela Merkel’s coalition parties signaled they won’t stand in the way of Draghi’s buying plan.
Volatility on Spanish bonds was the second highest in euro- area markets today behind Finland, according to measures of 10- year or similar-maturity debt, the spread between two-year and 10-year securities and credit-default swaps.
Germany’s 10-year yield rose 20 basis points to 1.42 percent, and the two-year yield climbed seven basis points to minus 0.02 percent. Yields below zero mean investors who hold the debt to maturity will receive less than they paid to buy them. The two-year rate reached minus 0.097 yesterday, matching the least since Bloomberg began collecting the data in 1990.
A composite index of euro-area services and manufacturing output, based on a survey of purchasing managers, rose to 46.5 last month from 46.4 in June, Markit Economics said today in a final report. Markit had initially reported a reading of 46.4 for July. A reading below 50 indicates contraction. Retail sales gained 0.1 in June, compared with the drop of 0.1 percent forecast in a Bloomberg News survey.
German bunds also declined along with U.S. Treasuries after a U.S. report showed employers hired more workers in July than economists forecast. The increase of 163,000, followed a revised 64,000 gain in June.
German debt has returned 4.5 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 6.3 percent, and Italy’s debt rose 6.5 percent.
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