Spanish securities declined after the country sold 3.99 billion euros ($5.17 billion) of two-, three- and five-year notes, while holding back from seeking financial aid that would trigger ECB purchases of its debt. German two-year notes fell after Draghi said policy makers didn’t discuss an interest-rate cut at their policy meeting today, where they kept the refinancing rate at a record-low 0.75 percent. Top-rated Finnish bonds also slipped as the ECB chief said the euro is “irreversible.”
“The market wants to see a request for aid and this is pressuring Spanish bonds,” said Alessandro Giansanti, a senior strategist at ING Groep NV in Amsterdam. “The auction went quite well in terms of the demand because the bonds were sold in the area where the ECB may buy, if Spain asks for help.”
Spanish two-year yields climbed six basis points, or 0.06 percentage points, to 3.29 percent at 4:25 p.m. London time. The 4.75 percent security due July 2014 fell 0.115, or 1.15 euros per 1,000-euro face amount, to 102.515. The 10-year yield rose nine basis points to 5.90 percent.
Spain sold 2015 notes at an average yield of 3.956 percent, up from 3.845 percent at the previous sale on Sept. 20. The country auctioned securities due in October 2014 at a yield of 3.282 percent and July 2017 debt at 4.766 percent. Investors bid for 1.98 times the number of three-year notes allotted, up from 1.56 times last month.
Spain was told by Europe’s economic overseers that its 2013 plan to cut the deficit to 4.5 percent of gross domestic product relies on excessively optimistic assumptions, two people familiar with the issue said.
Olli Rehn, the European commissioner in charge of policing budget rules, delivered the preliminary assessment to Spanish Economy Minister Luis de Guindos at a meeting in Madrid on Oct. 1, said the people, who declined to be named because the talks weren’t public.
The 10-year bund yielded 1.44 percent, erasing a five-basis point gain. It touched 1.42 percent on Sept. 28, the lowest level since Sept. 5. The two-year note yield rose one basis point to 0.04 percent.
The ECB is ready to undertake bond purchases “once all the prerequisites are in place,” Draghi said today at a press conference in Ljubljana, Slovenia. De Guindos has said that officials are still considering whether they need European Union aid. Italian Prime Minister Mario Monti said last week that aid shouldn’t hinge on more conditions than leaders already signed up to.
The region’s economic growth “is expected to remain weak, with ongoing tensions in some euro-area financial markets and high uncertainty still weighing on confidence and sentiment,” Draghi said. Still, policy makers didn’t discuss cutting rates.
German bunds fell after the ECB’s last meeting on Sept. 6 as Draghi unveiled the Outright Monetary Transactions program. The ECB would act if countries applied for aid to the euro region’s bailout fund, the European Stability Mechanism, which would then purchase government bonds in the primary market.
“The euro-zone situation is far from resolved,” John Wraith, a London-based fixed-income strategist at Bank of America Merrill Lynch said in an interview on Bloomberg TV’s Countdown with Mark Barton. “We think it will get worse before it gets better again, with the market forcing Spain to take a bailout.”
The safest government assets, including German bunds, will remain supported, he predicted. Finnish 10-year yields rose one basis point to 1.75 percent.
Analysts have raised their year-end bund-yield forecasts by 15 basis points since August. The 10-year bund yield will end the year at 1.65 percent, according to the Bloomberg weighted average of 34 analyst estimates, up from a prediction of 1.5 percent in August.
Volatility on Irish bonds was the highest in euro-region markets today, followed by Portuguese securities, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit default swaps.
German bonds have returned 3.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spain’s securities gained 1.4 percent and France’s rose 7.7 percent.