Spanish Bonds Jump on ECB Optimism; Bunds Rise on U.S. Jobs Data

Spanish bonds rose, pushing 10-year yields below 6 percent for the first time in four months, amid optimism that the European Central Bank’s planned asset-purchase program will lower the nation’s borrowing costs.

Italian bonds also gained, reducing the extra yield that investors demand for holding the nation’s 10-year securities instead of similar-maturity German bunds to the least in five months. Bunds advanced, paring a weekly decline, after U.S. payrolls rose less than economists forecast in August. Portugal’s 10-year rates fell to the lowest in almost 18 months as the ECB’s plan boosted demand for higher-yielding assets.

“The ECB delivered what was expected, and it’s a very powerful tool that they’ve got,” said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. “They could drive yields down as far as they want, to a certain extent.”

The Spanish 10-year yield slipped 39 basis points, or 0.39 percentage point, to 5.64 percent as of 4:19 p.m. London time, after falling to 5.63 percent, the lowest since April 4. The 5.85 percent bond due in January 2022 gained 2.795, or 27.95 euros per 1,000-euro ($1,279) face amount, to 101.495. Italy’s 10-year yield dropped 18 basis points to 5.08 percent.

The spread between Italian and German 10-year yields shrank 14 basis points to 3.56 percentage points after narrowing to 3.44 percentage points, the least since April 4.

Default Swaps

Credit-default swaps on the sovereign bonds of Spain and Italy are set for their biggest weekly declines since the European Union committed almost $1 trillion to backstop the region’s debt in May 2010.

Contracts on Spain dropped 34 percent to 342 basis points from 518 basis points on Aug. 31, and those on Italy fell 32 percent to 314 from 467. A decrease signals improving perceptions of credit quality.

ECB President Mario Draghi told reporters in Frankfurt that asset purchases “will enable us to address severe distortions in government bond markets, which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.”

Policy makers are ready to use the resources needed to reach the objectives in their bond-buying plan, ECB Governing Council member Ardo Hansson said.

‘No Limits’

“No limits were set yesterday, we are ready to use as many resources as needed to achieve these goals,” Hansson, who is the Governor of Estonia’s central bank, said on national public television today. The ECB wants “to fix the situation in the money market so that our goal of preserving price stability would work all over euro area.”

Germany’s 10-year yield slipped four basis points to 1.52 percent, after rising to 1.63 percent, the highest since June 29. The rate has gained 18 basis points this week, the most since the five days through July 27. The two-year rate was at 0.03 percent, from minus 0.035 percent at the end of last week.

The U.S. economy added 96,000 workers last month following a revised 141,000 increase in July that was smaller than initially estimated, Labor Department figures showed today in Washington. The median estimate of 92 economists surveyed by Bloomberg called for a gain of 130,000. Unemployment fell to 8.1 percent, and hourly earnings were unchanged.

Bond Volatility

Volatility on Irish bonds was the highest in euro-region markets today, followed by Spain and Portugal, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit default swaps.

The yield on Ireland’s securities due October 2020 fell 20 basis points to 5.64 percent, while that on Portuguese debt maturing in October 2023 slipped as much as 61 basis points to 8.09 percent, the lowest level since March 31, 2011.

German bunds dropped earlier as reports showing the country’s exports and industrial production unexpectedly rose in July added to evidence that Europe’s largest economy will avoid a recession, damping demand for the euro-area’s safest assets.

Exports increased 0.5 percent in July from June, when they fell 1.4 percent, the Federal Statistics Office in Wiesbaden said today. Economists predicted a 0.5 percent decline, according to the median estimate in a Bloomberg News survey.

Production rose 1.3 percent from June, when it fell a revised 0.4 percent, the Economy Ministry in Berlin said today. Economists forecast unchanged production, a survey showed.

German government bonds returned 2.7 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italy’s rose 14 percent and Spain’s were little changed.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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