Spanish Bonds Drop Amid Aid Request Concern; German Bunds Rise

Spanish securities fell, led by two-year notes, amid concern the government may hold off from requesting financial assistance, damping optimism the European Central Bank will buy the nation’s debt.

German 10-year bunds rose, pushing yields down from the highest level in more than 10 weeks. Spanish notes also dropped after Fitch Ratings said it may cut the autonomous community of Catalonia’s rating to junk. Italian two-year debt pared a decline as the nation sold three-year notes at the lowest rate in almost two years. An ECB policy maker said the central bank might not have to buy euro-area government bonds after rates fell on the threat of unlimited purchases.

Recent gains in Spanish bonds were “in anticipation of ECB buying,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “You start to get an unwinding of that flow if there’s any signs that Spain will take the view that spreads have come in so they don’t have to do anything more.”

Spain’s two-year yield climbed 13 basis points to 2.95 percent at 4:12 p.m. London time. That compares with a euro-era record 7.147 percent reached on July 25. The 4.75 percent note due July 2014 fell 0.235, or 2.35 euros per 1,000-euro ($1,289) face amount, to 103.21. The nation’s 10-year bond yield added one basis point to 5.64 percent after sliding eight basis points over the past two days.

Italian Auction

Italy’s two-year yield added seven basis points to 2.26 percent after advancing to as much as 2.29 percent.

The Italian government sold 4 billion euros three-year notes at an average yield of 2.75 percent, the Bank of Italy said. That compares with a rate of 4.65 percent at a sale of the securities on July 13. Investors bid for 1.49 times the amount allotted, down from a so-called bid-to-cover ratio of 1.73 in July.

The nation also sold bonds due in 2017 and 2026. Ireland auctioned three-month securities, its second bill sale since the nation was bailed out.

German 10-year yields dropped six basis points to 1.56 percent after rising to 1.65 percent yesterday, the highest since June 29.

The yield was below its 200-day moving average, currently 1.641 percent, after yesterday climbing above it for the first time since July 8, 2011.

ECB Program

Spanish leaders said yesterday they can delay a decision on seeking a bailout as borrowing costs decline, with their focus on ensuring any rescue doesn’t roil markets. Spain’s 10-year yields have fallen about 80 basis points since ECB President Mario Draghi said on Sept. 6 the bank could buy cash-strapped nations’ debt if they seek help from the region’s government-run rescue mechanism first.

“A central bank has this wonderful ability that no other player in the market has when it says ‘I’m going to do whatever it takes,’ and everyone believes that,” ECB Governing Council member Panicos Demetriades, who heads the Central Bank of Cyprus, said in an interview in Nicosia yesterday. “In the end, they may do nothing.”

Spain’s Treasury said today it will sell 2 billion euros of bonds in a private placement to finance part of the 18-billion euro regional bailout fund.

Volatility on Irish bonds was the highest in euro-area markets today, followed by the Netherlands and Finland, according to measures of 10-year or equivalent-maturity debt, the spread between two-year and 10-year securities and credit- default swaps.

Dutch Elections

Dutch securities advanced after voters rejected the anti- euro Freedom Party in elections yesterday.

The additional yield, or spread, investors demand to hold Dutch 10-year bonds over similar-maturity bunds fell for a third day after the nation’s Liberal Party beat the Labor Party in yesterday’s parliamentary elections. The spread narrowed to as little as 24 basis points, the lowest since Jan. 17.

“There was a real danger before the elections that this thing was going to swing in the direction of the extremes,” said Padhraic Garvey, head of developed-markets debt at ING Bank NV in Amsterdam. “There’s been a centrist victory. It’s been positive for Dutch government bonds.”

Garvey spoke in an interview on Bloomberg Television’s “The Pulse” with Elliot Gotkine.

The yield on Greece’s bond due February 2023 fell for a third day even after Dow Jones reported the nation will need another bailout. The rate dropped two basis points to 20.70 percent, after earlier jumping as much as 161 basis points.

“Greece will require additional financing, which may take the form either of Official Sector Involvement or of additional loans, hopefully on more favorable terms,” Thanos Catsambas, an alternate executive director at the International Monetary Fund, told the newswire in an interview.

German bonds returned 2.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities advanced 1.9 percent, while Italy’s debt made 15 percent.

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

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

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