Bloomberg News

Spanish Bonds Rise Most Since Start of Euro on Draghi Debt Plan

September 08, 2012

Spanish bonds rose, pushing 10-year yields down by the most in a week since the euro was introduced, as the European Central Bank’s new bond-purchase program fueled optimism that the region’s debt crisis will be contained.

Italian bonds also advanced, reducing the extra yield that investors demand for holding the nation’s 10-year securities instead of similar-maturity German bunds to the least in five months. ECB President Mario Draghi said two days ago that policy makers agreed to an unlimited debt-purchase program to cap borrowing costs for so-called peripheral nations. Ten-year bund yields rose by the most in six weeks.

“What the ECB did has effectively removed a risk of a massive sell-off in Spanish and Italian notes,” said Mohit Kumar, the head of European fixed-income strategy at Deutsche Bank AG in London. “If you are an investor, going short Italian or Spanish bonds, especially those with short-dated maturities, will have the poorest reward profile.” A short position is a bet an asset will decline.

The Spanish 10-year yield dropped 122 basis points from Aug. 31, or 1.22 percentage point, to 5.63 percent, as of 5 p.m. London time yesterday. That’s the biggest one-week decline since the euro was introduced in 1999. The 5.85 percent bond due in January 2022 gained 8.365, or 83.65 euros per 1,000-euro ($1,271) face amount, to 101.505. Spain’s two-year yields declined 94 basis points from last week to 2.72 percent, the biggest weekly fall since the five-day period ended Aug. 3.

‘Severe Distortions’

Draghi said that, when requested, asset purchases “will enable us to address severe distortions in government bond markets, which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.”

Italy’s 10-year yield dropped 77 basis points last week to 5.08 percent. The spread between Italian and German 10-year yields shrank to as low as 3.44 percentage points yesterday, the least since April 4.

Germany’s 10-year yield climbed 18 basis points from Aug. 31 to 1.52 percent, the biggest increase in yield since the five days through July 27. The two-year rate rose seven basis points to 0.03 percent, from minus 0.035 percent at the end of last week.

German bonds may extend a decline next week before the Federal Finance Agency sells 5 billion euros of five-year notes on Sept. 12.

Spanish bonds handed investors a 5.5 percent return since the end of July while German debt fell 1.4 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds returned 6.4 percent during the same period.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net;

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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