Italian, Spanish Bonds Snap Six-Day Decline on Speculation of ECB Buying
EU Economic and Monetary Affairs Commissioner Olli Rehn
Jock Fistick/Bloomberg
European Union Economic and Monetary Affairs Commissioner Olli Rehn.
European Union Economic and Monetary Affairs Commissioner Olli Rehn. Photographer: Jock Fistick/Bloomberg
July 12 (Bloomberg) -- Peter Chatwell, a fixed-income strategist at Credit Agricole CIB, talks about the increase in Italian bond yields. Italian 10-year yields soared to the highest level since 1997 on concerns the European debt crisis is spreading. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)
Italian and Spanish bonds rose on speculation the European Central Bank bought the debt of the euro region’s most-indebted nations to stabilize markets amid concern that the debt crisis is worsening.
Greek 10-year yields fell the most in almost two weeks while equivalent-maturity Spanish yields retreated from a euro- era record reached earlier. Italian bonds rose, with yields below 6 percent after breaching the level for the first time since 1997. The 27 European Union finance ministers continued meetings today after euro-region officials said late yesterday that they may revive bond buybacks to ease Greece’s debt woes. An ECB press officer declined to comment on whether it bought so-called peripheral euro-region bonds today.
“The suspicion has to be that there has been some unofficial central bank activity this morning, be that the ECB, or Asian central banks or a combination of the two,” said John Davies, a fixed-income strategist at WestLB AG in London. “The hurdles of the T-bill auctions from Italy, Greece and, to a lesser degree, Belgium, were overcome successfully.”
Yields on 10-year Italian bonds declined for the first time in seven days, falling 12 basis points to 5.56 percent as of 4:33 p.m. in London. The yields climbed as high as 6.02 percent, widening the spread over German bunds to 318 basis points, a euro-era record. Spanish 10-year yields were 18 basis points lower at 5.85 percent, after surging to 6.31 percent, the most since 1997.
Euro Slips
Irish 10-year bond yields increased 15 basis points to 13.35 percent after reaching a record 13.68 percent. Greek 10- year yields declined 24 basis points to 16.77 percent while Portuguese yields of equivalent maturity dropped 82 basis points to 12.56 percent.
The euro slid to $1.3837, an almost four-month low, while the Stoxx Europe 600 Index fell as much as 2.7 percent for the biggest three-day drop since March.
Ten-year bund yields rose three basis points to 2.70 percent, after reaching as little as 2.50 percent, the least since November. Two-year German note yields added two basis points to 1.28 percent, after reaching 1.05 percent, the least since January.
Investor impatience with the EU’s response to the fiscal crisis punished the bloc’s most debt-ridden states yesterday, prompting a surge in borrowing costs across so-called peripheral states. The 17 euro-area finance ministers issued a six- paragraph statement yesterday, following a nine-hour meeting in Brussels, pledging to flesh out details of a new strategy to end the 21-month-old crisis “shortly,” without setting a timeline.
Closed Short Positions
“Speculation of central bank involvement encouraged short positions in peripherals to be closed,” said Peter Chatwell, a strategist at Credit Agricole Corporate & Investment Bank in London. “If the ECB were to announce an intention to buy, then it would have the same effect: shorts would scuttle to cover their positions.”
Euro-area finance ministers agreed that investors should play a role in the second bailout of Greece currently being discussed, European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels today.
“This was lengthily discussed yesterday in the meeting of the eurogroup, understandably because it’s a difficult issue,” said Rehn. “The ministers came to a consensual agreement on the parameters for private-sector involvement.”
Ministers from the 27 EU nations began meeting today with the aim of crafting a response to the release of bank stress tests later this week.
Greek Rollover
A new strategy to contain the euro area’s debt crisis may require reinforcing the European Financial Stability Facility, the 440 billion-euro bailout fund that was beefed up only last month. Talks with bondholders over a rollover plan for Greek debt have been snapped by warnings from credit-rating companies that the arrangement risked putting Greece in default.
Spanish Finance Minister Elena Salgado said her nation still opposes private-sector involvement in any Greek rescue.
“Spain’s position has not changed since this idea was put on the table in November,” she said in the Senate in Madrid today. “Private investors’ participation is not a good idea; in fact we think this is one of the causes of instability we’re suffering from, so we need to find a solution.”
The cost of insuring against default on debt sold by Europe’s peripheral governments rose to records earlier amid contagion from the region’s debt crisis.
Credit-Default Swaps
Credit-default swaps on Greece surged 150 basis points to 2,453, signaling an 88 percent probability of default within five years, according to CMA prices in London, before settling at 2,324, up 21 basis points from yesterday.
Swaps on Ireland slid 15 basis points to 1,000 after reaching 1,086, Italy slipped 16 to 286 after rising to 343. Portugal dropped 89 basis points to 1,048 after rising to 1,187 and Spain reached 380 basis points before falling 29 to 320, according to CMA data.
Italy sold 6.75 billion euros of one-year Treasury bills at an average yield of 3.67 percent at an auction today. Investors bid for 1.55 times the amount of securities on sale, down from 1.71 times at a previous auction of similar-maturity debt held June 10, which achieved a yield of 2.147 percent.
Italy is scheduled to sell securities due in April 2016, February 2017, August 2023 and March 2026 on July 14.
“Though the yield is well up from levels earlier this year, Italy can afford 3.67 percent,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole CIB.
Debt Auctions
Greek borrowing costs fell at an auction of six-month Treasury bills. Greece sold 1.625 billion euros of securities at a yield of 4.90 percent. Investors bid for 2.88 times the amount of debt on sale. That compares with a so-called bid-to-cover ratio of 2.58 at a previous sale of similar-maturity debt held June 14, which was sold at a yield of 4.96 percent.
Belgian 10-year bonds rose, lowering yields on the securities by three basis points to 4.26 percent. The nation’s borrowing costs for 12-month Treasury bills rose to the highest in more than 2 1/2 years as demand for the securities fell at auction today.
The Treasury sold 1.07 billion euros of 12-month bills, less than planned, at a weighted average yield of 1.884 percent, the debt agency in Brussels said. That’s the highest yield since an auction on Dec. 16, 2008, and compares with a yield of 1.625 percent when similar securities were last sold on June 14. Investors put in bids for 1.54 times the amount of notes sold, down from 2.18 times four weeks ago and the lowest bid-to-cover ratio since Dec. 14 last year.
To contact the reporters on this story: Garth Theunissen in at gtheunissen@bloomberg.net; Keith Jenkins in London at Kjenkins3@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.
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