Spain, Italy Notes Rise on ECB-Driven Demand; German Yields Fall to Record

Spanish and Italian notes advanced, leading gains in euro-area debt, on speculation banks bought the securities to use as collateral when the European Central Bank starts offering three-year loans next week.

Spain’s two-year yields fell to a four-month low after the nation sold almost double its initial maximum target of securities at an auction on Dec. 16. French and Belgian notes gained for a third week before the ECB starts its longer-term refinancing operation on Dec. 20. German and Dutch two-year yields dropped to euro-era records as some investors remained concerned the European debt crisis will worsen, underpinning demand for the region’s safest assets.

“The ECB’s refinancing operation is driving demand for shorter-dated European paper,” said Gianluca Ziglio, an interest-rate strategist at UBS AG in London. “After the Spanish auction, we are now going into a relatively quiet phase for issuance,” which puts less pressure on Spanish and Italian securities, he said.

Two-year Spanish yields fell 122 basis points, or 1.22 percentage points, this week to 3.45 percent at 4:40 p.m. in London yesterday. The 2.5 percent note due October 2013 gained 2.13, or 21.30 euros per 1,000-euro ($1,303) face amount, to 98.31. The yields dropped to 3.10 percent yesterday, the lowest since Aug. 9.

Italian two-year yields slid 61 basis points this week to 5.35 percent, extending their decline from a euro-era record 8.12 percent on Nov. 28.

Access to Funds

ECB President Mario Draghi said on Dec. 8 he would offer banks cash for three years to improve their access to liquidity. When the operations start next week, the companies can borrow unlimited funds from the central bank in return for eligible collateral, including euro-region government bonds.

Belgian two-year yields fell 70 basis points this week to 2.60 percent, extending their three-week decline to 248 basis points. Similar-maturity French rates dropped 17 basis points to 0.91 percent.

German two-year rates fell 10 basis points over the week to 0.22 percent, and touched a record of 0.214 percent yesterday. Dutch two-year yields dropped nine basis points to 0.3 percent, after falling to a euro-era low 0.293 percent.

Economists say an industry report next week will show German business confidence declined in December, spurring demand for safer assets. The Munich-based Ifo institute’s business climate index, based on a survey of executives, fell to 106 from 106.6 in November, according to a Bloomberg News survey before the data is released on Dec. 20.

Spanish government bonds have returned 4.6 percent this year through Dec. 15, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. German bunds gained 9 percent, Italian debt dropped 7 percent and French bonds rose 4.9 percent.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

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

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.