European government bonds rose, led by the securities of higher-yielding nations such as Italy and Spain, amid speculation the Federal Reserve and other central banks will maintain stimulus to keep borrowing costs low.
Spanish (GSPG10YR) 10-year bonds advanced for a third day after Standard & Poor’s said the nation’s commitment to fiscal and structural reforms remains strong. Germany (GDBR10)’s 10-year bunds rose for a fourth day, while Belgian and Austrian bonds also advanced. Fed Chairman Ben S. Bernanke, who will lead the central bank’s meeting next week, has said a reduction in asset purchases wouldn’t mean an end to its record easing program. Spain plans to sell debt due between 2018 and 2023 next week.
“The main driver of markets in recent weeks has been speculation about what the Fed will do,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit Global Research in Milan. “There’s speculation that next week the Fed will try to smooth out a bit the recent reaction. If the Fed tries to clarify a bit what its intentions will be, that could have a big impact. This would be supportive for Spanish and Italian bonds.”
Spain’s 10-year yield fell three basis points, or 0.03 percentage point, to 4.59 percent at 4:31 p.m. London time after climbing to 4.76 percent on June 11, the highest level since April 9. The 5.4 percent bond due in January 2023 gained 0.21, or 2.10 euros per 1,000-euro ($1,334) face amount, to 106.15.
Italian 10-year yields dropped seven basis points to 4.29 percent, and similar-maturity Portuguese rates slid 25 basis points to 6.28 percent.
The Fed is buying $85 billion of Treasuries and mortgage-backed securities each month to put downward pressure on borrowing costs. Bernanke will have an opportunity to retune the central bank’s message during a press conference on June 19 after the Fed’s two-day meeting.
The Wall Street Journal reported that the Fed may push back on expectations of a rate increase. Speculation the U.S. central bank was moving toward reducing asset purchases saw bonds and stocks slide around the world during the past month.
“The Fed wants to make sure that the very negative reaction we’ve seen over the past few weeks doesn’t continue,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris. “It doesn’t want the market upset because that would stop the nascent recovery in its tracks. This can provide some respite for markets, helping European bonds.”
Germany’s 10-year bund yield fell five basis points to 1.51 percent after climbing to 1.66 percent on June 11, the highest level since Feb. 20. The yield on 10-year Belgian bonds slid seven basis points to 2.32 percent, while similar-maturity Austrian yields declined seven basis points to 1.91 percent.
Volatility on Portuguese bonds was the highest among euro-area markets today followed by those of the Netherlands and Belgium, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
S&P kept Spain’s credit rating at BBB- and left its outlook on the long-term rating as negative. There is the potential for a downgrade if political support for the reform agenda dwindles, analysts Marko Mrsnik and Frank Gill wrote in a statement today.
Spain will auction bonds due in July 2018, April 2021 and October 2023 on June 20, the nation’s debt agency said.
“The need of increasing its debt duration has probably been the key factor behind the decision to tap eight- and 10-year bonds next week,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, wrote in a note to clients. The nation will probably sell about 4 billion euros, she wrote.
Italy’s government debt rose to a record 2.041 trillion euros in April from 2.035 trillion euros in March, the central bank said today in its public-finances supplement. Foreign ownership of Italian (GBTPGR10) securities rose to 35.6 percent in March from 35.2 percent in February.
Spanish bonds returned 5.5 percent this year through yesterday, according to the Bloomberg Spain Sovereign Bond Index. (BSPS) Italian securities gained 2.6 percent, while German bonds declined 0.9 percent, separate Bloomberg indexes show.
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