Spanish, Italian Bonds Rise After Debt Auction, ECB Holds Rates

Spanish and Italian 10-year bonds rose for a second day, outperforming German bunds, amid speculation that European Central Bank policy makers may take steps to calm Europe’s debt crisis at a meeting today.

The ECB “probably will be forced” to step up programs to fight the crisis, said Juergen Michels, chief euro-region economist at Citigroup Inc. Policy makers kept their key rate unchanged at 1 percent, a decision that was predicted by all 52 analysts in a Bloomberg survey. ECB President Jean-Claude Trichet will explain the outcome at a press conference at 2:30 p.m. in Frankfurt. Spain drew stronger demand at a sale of three-year notes today, with France also selling bonds.

“There is some speculation that the ECB may announce additional measures to stem the pressures in the bond market,” said Elwin de Groot, a senior market economist at Rabobank Groep in Utrecht, Netherlands. “That’s driving the market.”

The Spanish 10-year bond yield slid 15 basis points to 5.19 percent as of 12:53 p.m. in London. The 4.85 percent security maturing in October 2020 rose 1.14, or 11.40 euros per 1,000- euro ($1,317) face amount, to 97.41. The extra yield investors demand to hold the debt instead of similar-maturity German bonds narrowed 19 basis points to 232 basis points.

German bund yields touched the highest since May 18 as stocks advanced, damping demand for the safest fixed-income assets. The yield rose as much as seven basis points to 2.85 percent, and was last at 2.82 percent. Italian 10-year yields declined eight basis points to 4.46 percent.

The Stoxx Europe 600 Index of shares jumped 0.6 percent, extending a 2 percent gain yesterday, and the euro strengthened 0.2 percent to $1.3169.

Spanish Sale

Bonds issued by high-deficit euro-area nations jumped yesterday after Trichet signaled the previous day that investors were underestimating policy makers’ determination to stabilize the region. The debt slumped through November, with Spanish 10- year securities rising on just two days that month, amid concern the European crisis would force more nations to accept bailouts.

Spanish three-year yields plunged 21 basis points to 3.85 percent after the nation drew stronger demand for three-year notes than at a previous auction in October. Spain raised 2.5 billion euros at the sale at an average yield of 3.717 percent, from 2.527 percent in October. Investors bid for 2.27 times the volume sold, from 2.16 in October.

“The decent amount executed at a very confident price premium paints a picture of good quantity and quality of demand,” Peter Chatwell, a fixed-income strategist at Credit Agricole SA in London, said today by e-mail.

Trade Recommendation

France sold 5.395 billion euros of securities maturing in 2017, 2018 and 2025.

“I don’t believe that financial stability in the euro zone could really be called into question,” Trichet told lawmakers in Brussels two days ago. Observers “are tending to underestimate the determination of governments.”

Investors should reduce their bets that bonds from Ireland, Portugal, Greece and Spain will fall in the near term as risks that policy makers will intervene have increased, according to JPMorgan Chase & Co.

“The ECB could provide a temporary fix through increased bond purchases,” JPMorgan strategists including New York-based Jan Loeys wrote in a research note received today. “Without a large-scale official intervention, intra-EMU spreads will keep on widening. Stay short on peripherals, but keep positions light.”

Exports from the 16-member euro region rose 1.9 percent in the third quarter from the previous period, when they increased 4.3 percent, the European Union’s statistics office in Luxembourg said today. Investment stalled after rising 1.7 percent in the second quarter, while spending growth by consumers accelerated to 0.3 percent from 0.2 percent. Gross- domestic-product growth eased to 0.4 percent from 1 percent.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

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

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