Spanish, Italian Notes Fall as ECB Debt-Purchase Optimism Wanes

Spanish and Italian two-year notes fell for a third day amid speculation the European Central Bank’s plan to purchase the two nations’ securities won’t be sufficient to stem the regional debt crisis.

The notes underperformed their regional peers after an ECB quarterly survey of professional forecasters predicted the euro- area contraction this year will be worse than previously estimated. Spanish and Italian bonds jumped last week after ECB President Mario Draghi said the central bank may buy government debt in unison with the region’s bailout funds. Greek bonds dropped for the first time in four days as the jobless rate climbed to the most on record.

“The market’s keeping a close eye on Italy and Spain,” said David Schnautz, a New York-based fixed-income strategist at Commerzbank AG. “The momentum since the ECB meeting is running out of steam. Spanish bonds are under some pressure. The market gets nervous when it sees double-digit increases in two-year yields.”

Spain’s two-year note yield climbed 15 basis points, or 0.15 percentage point, to 4.02 percent at 4:01 p.m. London time after falling to 3.38 percent on Aug. 6, the lowest level since May 9. The 4.75 percent bond due in July 2014 dropped 0.28, or 2.80 euros per 1,000-euro ($1,232) face amount, to 101.345.

The Italian two-year note yield climbed six basis points to 3.26 percent after rising 16 basis points during the previous two days.

‘Necessary Conditions’

The ECB said in its monthly bulletin today that it may intervene in bond markets in tandem with Europe’s bailout funds, only if troubled nations commit to improving their economies and fiscal positions.

“The adherence of governments to their commitments and the fulfillment by the European Financial Stability Facility/European Stability Mechanism of their role are necessary conditions,” the central bank said, echoing the comments made by Draghi on Aug. 2. The ECB “may undertake outright open market operations of a size adequate to reach its objective,” it said.

Spanish two-year note yields dropped by more than those on the nation’s 10-year bonds last week, pushing the so-called yield curve steeper.

DBRS Inc., one of the four companies accepted by the ECB to rate the securities it takes as collateral, yesterday downgraded the credit ratings of Spain and Italy, citing a weakening growth outlook in the countries and deteriorating funding conditions.

Germany’s bunds swung between gains and losses. The 10-year yield was three basis points higher at 1.45 percent after earlier falling as much as two basis points.

Yield Curve

The difference between Spanish two- and 10-year yields narrowed for a third day, shrinking 14 basis points to 287 basis points. The spread reached a record 343 basis points on Aug. 6, up from 182 basis points on the day before Draghi spoke.

The gap between Italian two- and 10-year yields contracted 11 basis points to 258 basis points. It widened to 310 basis points on Aug. 6, the most since March 8, according to data compiled by Bloomberg.

“The market has already tried to discount more ECB buying in short-dated maturities,” Commerzbank’s Schnautz said. “With two-year yields at these levels, it’s difficult to argue for much more steepness in the curve.”

Greek 10-year bonds fell after the number of citizens without a job increased toward a quarter of the total workforce.

The jobless rate rose to 23.1 percent from 22.6 percent in April, the Athens-based Hellenic Statistical Authority said. That’s the highest level since the agency began publishing monthly data in 2004.

The yield on Greek bonds due in February 2023 climbed three basis points to 24.31 percent. The price dropped 0.03 to 19.81 percent of face value.

German government bonds returned 3.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds fell 4.3 percent, and Italy’s rose 9.6 percent.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

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

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