Peripheral Debt Rises on Speculation Central Bank May Buy Region's Bonds

Irish and Portuguese bonds rose, narrowing the yield difference with benchmark German bunds, amid speculation the European Central Bank bought more assets of high-deficit nations to stem the debt crisis.

Irish 10-year bonds had their biggest weekly advance since May 14, when the European Union and International Monetary Fund announced a backstop for ailing nations. The ECB purchased Irish and Portuguese bonds today, according to at least four traders with knowledge of the transactions. Growth in the region’s services and manufacturing industries accelerated more than initially estimated in November, curbing demand for bunds.

“We’ve seen quite a sharp tightening of spreads in the past two days on increased ECB buying,” said Vincent Chaigneau, head of rate strategy at Societe Generale SA in London. “Investors are concerned the buying will continue in the near term. No-one seems willing to fight this.”

The yield on the 10-year Irish bond fell for a fourth straight day, dropping 38 basis points to 8.37 percent as of 5:13 p.m. in London. The 5 percent security maturing in October 2020 gained 2.09, or 20.90 euros per 1,000 ($1,337) face amount, to 77.93. The yield fell 97 basis points this week, narrowing the premium investors demand to hold the debt instead of bunds to 534 basis points from 646 basis points a week ago.

The yield on the German bund, Europe’s benchmark, rose five basis points to 2.86, after reaching 2.89 percent, the highest since May 18.

Increase Purchases

Bonds from so-called peripheral nations rallied this week as traders said that the ECB increased purchases of their government debt. The central bank bought Portuguese debt as well as Irish bonds today, said two people with knowledge of the deals who declined to be identified because the transactions are confidential.

ECB President Jean-Claude Trichet said yesterday policy makers extended stimulus measures to stem Europe’s “acute” market tensions. The central bank will maintain its bond-buying program and continue to sterilize asset purchases, he said. The ECB will offer banks unlimited loans through the first quarter, Trichet said.

The ECB may increase purchases of government bonds to ensure the sovereign debt crisis abates, according to Dirk Schumacher, an economist at Goldman Sachs Group Inc. in Frankfurt.

“We remain convinced that the political will among policy makers, including the ECB, to prevent any systemic event is unquestionable,” he wrote in a research report dated yesterday. “We could easily see the ECB stepping up its bond purchases aggressively if things do not start to normalize.”

Narrowed Yields

Portuguese government bond yields dropped 23 basis points to 6.08 percent, after the spread with bunds narrowed to less than 3 percentage points, or 300 basis points, for the first time since Aug. 24.

The ECB bond purchases won’t resolve the euro area’s debt woes and investors should step up sales of high-deficit nations’ securities, Royal Bank of Scotland Group Plc said.

“We do not think the non-core problems are over just because the buying program is stepped up,” Andrew Roberts, head of European interest-rate strategy in London, wrote in a note to investors today. “They are very much alive and this is just a temporary fix. Look for levels to add to peripheral shorts outside of Greece and Ireland, these pullbacks are still light in the big scheme of the prior widening.”

Greek 10-year bonds fell, sending the yield up 16 basis points to 12 percent. Standard & Poor’s placed the nation’s BB+ long-term sovereign rating on “CreditWatch” with a negative outlook. S&P said it’s assessing the implications of the so- called European Stability Mechanism that may govern EU sovereign bonds beginning in July 2013.

Greek Risk

Greece’s Minister of State Haris Pamboukis said the country was “surprised” by the decision.

Greece risks having to restructure its debt even with an extension in terms of the loan repayments by the EU, according to John Stopford, the London-based head of fixed income at Investec Asset Management, who helps oversee $65 billion for clients.

“You would be wrong to rule out the possibility of a debt restructuring at some point,” Stopford said. “Greece has a structural problem, and there has got to be risk we have another recession or economic crisis.”

Stimulus Withdrawal

Austria said it plans to reduce bond sales by as much as 27 percent next year as the nation withdraws emergency stimulus spending, banks begin to repay state aid and less debt comes due to be rolled over.

The Austrian Federal Financing Agency will issue 16 billion euros to 19 billion-euros worth of bonds in 2011, down from 22 billion euros this year, slides shown to primary dealers late yesterday say. Including instruments such as treasury bills, private placements and loans, issuance will be 22 billion to 25 billion euros, compared with 27 billion euros this year.

The 10-year Austrian yield rose four basis points to 3.3 percent.

Spanish yields dropped four basis point to 5.08 percent. Italian yields increased four basis points to 4.45 percent.

Markit Economics’s composite index based on a survey of euro-area purchasing managers in services and manufacturing rose to 55.5 last month from 53.8 in October, damping demand for the safety of fixed-income assets. Retail sales rose 0.5 percent in October, the EU statistics office said separately.

‘Give Margin Back’

LCH Clearnet Ltd. will reduce the extra margin it charges for Irish bond trading as yields fall, using the same criteria it applied when they rose, its head of fixed income said.

“Our tendency is to give margin back to people as soon as we reasonably can,” London-based fixed-income director John Burke said in a telephone interview yesterday. “On the way up, it was the fact that levels were sustained that we were checking. Likewise, in the reverse, it has to be sustained when it goes below the threshold on the way down, and it depends on how far below it has gone and the speed at which it got there.”

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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