Italian and Spanish bonds rose for a fourth day after European finance ministers agreed on a second bailout for Greece, spurring optimism the euro-area debt crisis will be contained.
The extra yield investors demand to hold Italy’s 10-year debt instead of German bunds shrank to the lowest since September after Greece won 130 billion euros ($172 billion) in aid following overnight talks in Brussels. German two-year note yields reached to the highest level in two months as demand for the region’s safest assets waned. Spain and the European Financial Stability Facility sold bills.
“Spain and Italy had the most to lose from a contagion effect if things had gone wrong, so they are the ones seeing the most relief,” said John Davies, a fixed-income strategist at WestLB AG in London. “To a large degree, a resolution in Greece was priced in so anything we see that’s positive today will be more of a sigh of relief than a shout of joy.”
The Italian 10-year (GBTPGR10) yield dropped four basis points, or 0.04 percentage point, to 5.44 percent at 4:33 p.m. London time after falling to 5.36 percent, the lowest since Sept. 9. The 5 percent bond due March 2022 climbed 0.3, or 3 euros per 1,000- euro face amount, to 97.19.
The extra yield investors demand to hold the securities instead of bunds narrowed six basis points to 346 basis points after shrinking to 337 basis points, the least since Sept. 8.
The assistance for Greece brings to at least 386 billion euros the amount spent or committed to save the nation along with Ireland and Portugal from bankruptcy, and to insulate Europe from the financial crisis. Concern the turmoil would spread pushed Italian and Spanish 10-year bond yields to euro- era highs last year.
“The Greece deal looks comprehensive, reasonable, of course, and seems to be richer in detail than the European Union summit results, implying a lower risk of market disappointment,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “I expect an only moderate bond-market reaction, with bunds lower and peripheral bonds firmer.”
Investors will forgive 53.5 percent of their principal and exchange their remaining holdings for new Greek bonds and notes from the EFSF, the International Institute of Finance, which represented bondholders, said in a statement.
Germany’s 10-year bund yield rose one basis point to 1.97 percent. Germany’s two-year yield was little changed at 0.26 percent after rising to 0.29 percent, the highest since Dec. 15.
The Greek benchmark October 2022 bond gained, with the yield dropping 42 basis points to 33.42 percent and the price climbing to 21.28 percent of face value.
Greece will enjoy economic growth now the rescue package has been approved, said Charles Dallara, IIF managing director.
“It rarely happens that there is not a rebound for at least a period of 18 to 24 months,” he said today in a Bloomberg Television interview in Brussels. “I’m quite optimistic there will be a rebound, and it may catch all of us by surprise.”
Portugal’s 10-year bonds fell, with the yield rising 18 basis points to 12.43 percent.
Spain sold three-month bills at an average yield of 0.396 percent, versus 1.285 percent at the previous auction of the maturity on Jan. 24. It sold six-month securities at 0.764 percent, compared with 1.847 percent at the previous auction.
The nation’s borrowing costs have declined since the European Central Bank lent the region’s banks 489 billion euros of three-year loans on Dec. 21. The ECB is planning a similar longer-term refinancing operation on Feb. 29.
“It was obviously a very strong result” at the auction, said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “It could still be LTRO-related flow or positioning for the next one, perhaps. There hasn’t been a massive risk-on move today, which this result would imply, so it suggests other factors are at work.”
The EFSF sold 1.99 billion euros of 182-day bills at an average yield of 0.19 percent. Investors bid for 3.12 times the securities on offer.
German bunds have handed investors a loss of 0.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds gained 9.3 percent and Greek bonds dropped 4.1 percent.
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