German Bunds Hold Decline on Bond ECB Buying Speculation

Italian bonds rose for a second day after Prime Minister Mario Monti said the region’s permanent rescue fund will gain access to central bank liquidity, adding to optimism leaders are addressing the euro debt crisis.

German 10-year bund yields were six basis points from a three-week high before the European Central Bank announces its policy decision amid speculation it will introduce new measure to support Spanish and Italian bonds. Spain’s 10-year bonds rose as the nation auctioned 3.1 billion euros ($3.8 billion) of securities maturing from 2014 to 2022. Two-year German notes held losses from yesterday.

“Monti’s comments contribute to the general climate of positivity in the market, which is supportive for Italian debt,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA (UCG) in Milan. “Those investors expecting a big announcement today will probably be disappointed but the threat is still out there so they will probably be cautious about shorting Spanish and Italian bonds.”

The Italian 10-year yield fell 11 basis points, or 0.11 percentage point, to 5.82 percent at 10:29 a.m. London time. The 5.5 percent bond due September 2022 rose 0.82, or 8.20 euros per 1,000-euro face amount, to 98.21.

Monti said the European Stability Mechanism would gain access to ECB funds via a bank license.

License ‘Help’

“I think this would help, I think this will in due course occur,” the premier said at a news conference in Helsinki yesterday. Monti’s assertion was a rebuff to Chancellor Angela Merkel’s Cabinet, hours after ministers meeting in Berlin hardened their opposition to granting the planned bailout fund access to central-bank resources.

The German 10-year yield was little changed at 1.37 percent after rising to 1.43 percent on July 30, the highest level since July 5. The two-year note yield was also little changed, at minus 0.08 percent. A negative rate means investors who hold the debt to maturity will receive less than they paid to buy them.

Spanish 10-year yields slipped eight basis points to 6.65 percent. They have declined from record highs since ECB President Mario Draghi last week promised to “do whatever it takes” to defend the common currency.

Spain sold 3.13 billion euros of bonds, the Bank of Spain said, compared with a maximum target of 3 billion euros.

The Treasury in Madrid sold its 10-year benchmark bond at an average yield of 6.647 percent, compared with 6.43 percent when it was last auctioned on July 5. Notes maturing in October 2016 had an average yield of 5.971 percent, compared with 5.536 percent last month and July 2014 securities yielded 4.774 percent.

German 10-year bund yields dropped seven basis points to 1.38 percent when the ECB cut its benchmark rate to a record-low 0.75 percent at its previous policy meeting on July 5.

German debt has returned 3.6 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 4.7 percent, while Italy’s debt rose 8.1 percent.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

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

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