Spanish, Italian Notes Decline as ECB Loans Top Forecast; Bunds Advance

Spanish two-year government notes fell for the first time in nine days amid fading optimism that the European Central bank’s three-year loans to euro-area banks will restore confidence in sovereign borrowers.

Italian two-year note yields rose from a seven-week low, after the Frankfurt-based ECB allotted 489 billion euros ($645 billion) in 1,134-day loans, almost double the median estimate of 293 billion euros in a Bloomberg News survey of economists. German 10-year bonds rose, snapping a two-day drop as demand increased for the region’s benchmark assets. Italian debt stayed lower even as the ECB was said to buy the securities.

“Italy and Spain are under pressure, they’ve had a good run,” said Richard McGuire, a fixed-income strategist at Rabobank International in London. “We don’t know how much of this is due to banks in Europe being in trouble and having problems financing themselves.”

Spain’s two-year yields advanced 29 basis points, or 0.29 percentage point, to 3.64 percent at 4:42 p.m. London time. They fell as much as 11 basis points before the announcement. The 2.5 percent security due October 2013 fell 0.49, or 4.9 euros per 1,000-euro face amount, to 98.00. Ten-year Spanish yields rose 21 basis points to 5.27 percent, trimming a six-day decline.

Italy’s two-year yields advanced 11 basis points to 5.09 percent, after falling to 4.74 percent, the least since Oct. 31. They pared an increase of as much as 31 basis points after the ECB was said to buy Italian bonds.

ECB Collateral

The Stoxx Europe 600 Index fell 0.5 percent after rising as much as 1.4 percent before the ECB’s announcement.

The ECB said 523 banks asked for the funds, which will be lent at the average of its benchmark rate, currently 1 percent, over the period of the loans. They start tomorrow.

Yields on government bonds in Italy and Spain fell in the days after the ECB announced the loans on Dec. 8 as banks bought the securities to use them as collateral in today’s tender. French President Nicolas Sarkozy has suggested banks could use the loans to buy even more government debt.

Spanish and Italian two-year note yields have fallen more than 1 percentage point since Dec. 8.

The three-year loans are a form of quantitative easing, John Taylor, founder of currency-hedge fund FX Concepts LLC said in an interview on Bloomberg Television’s “Inside Track” with Erik Schatzker.

“Three-year money at a low price -- you can give it back after a year -- it’s a giveaway. What scares me is what the hell are they going to do with it? They’ll buy Spanish and Italian debt,” Taylor said.

‘Hoovering’ Up

Banks have been “hoovering them up as collateral and now they don’t need them immediately for this reason,” said Eric Wand, a fixed income strategist at Lloyds Bank Corporate Markets in London, referring to Italian and Spanish debt. “That’s why they are cheapening, they are back to asking more fundamental questions.”

The European Central Bank bought Italian government bonds today, according to three people with knowledge of the transactions, who declined to be identified because the trades are confidential. A spokesman for the ECB in Frankfurt declined to comment on asset purchases.

Barclays estimates today’s operation will inject 193 billion euros of new money into the system, with 296 billion euros accounted for by maturing loans. The ECB also lent banks $33 billion for 14 days in a regular dollar offering, up from $5.1 billion a week ago, and 29.7 billion euros for 98 days.

Bund Issuance

German 10-year yields fell two basis points to 1.93 percent. Two-year note yields increased two basis point to 0.23 percent.

Bunds rose as the nation’s Federal Finance Agency said Chancellor Angela Merkel’s government lowered planned debt sales next year. The government will sell 250 billion euros of securities in 2012, compared with 270 billion euros slated in the budget and 283 billion euros sold this year, the Frankfurt- based finance agency said today.

German bonds have handed investors a 2.4 percent gain this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, extending the year-to-date return to 9 percent. Spanish bonds advanced 6.6 percent in 2011, while Italian securities lost 4.7 percent, the indexes show.

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.

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