European government bonds fell, pushing up borrowing costs for all euro-area sovereigns, as the Bank of Japan’s decision to leave monetary policy unchanged damped speculation central banks will increase debt purchases.
Spanish 10-year yields climbed to the highest level in two months as European stocks slumped. Portuguese and Irish bonds slid after European Central Bank President Mario Draghi told German television yesterday that debt buying will only be used to target prices that are out of line with fundamentals. German 10-year yields rose to the most in more than three months as a court began hearings on the ECB’s stimulus plan.
“Investors are realizing that very low funding rates aren’t set in stone and that’s feeding through into the euro rates market,” said Michael Leister, an interest-rate strategist at Commerzbank AG in London. “We are seeing a lot of volatility and the jury remains out on exactly what the BOJ will achieve. European bonds remain under pressure and the picture looks weak.”
Spain’s 10-year yield increased six basis points, or 0.06 percentage point, to 4.65 percent at 4:39 p.m. London time after rising to 4.76 percent, the highest level since April 9. The 5.4 percent bond due in January 2023 declined 0.44, or 4.40 euros per 1,000-euro ($1,326) face amount, to 105.68.
Similar-maturity Italian yields gained six basis points to 4.35 percent after rising as much as 18 basis points to 4.47 percent.
Portugal’s 10-year yield climbed as much as 43 basis points to 6.65 percent, the highest since Feb. 26. Ireland’s 10-year rate rose 14 basis points to 4.22 percent and similar-maturity Greek yields jumped 42 basis points to 9.98 percent.
The Stoxx Europe 600 Index of shares slid 1.2 percent.
The BOJ ended a two-day meeting in Tokyo today leaving its plans for the annual increase in the monetary base unchanged and refraining from extending the maturity of loans to banks. Twenty of 23 economists surveyed by Bloomberg News before the decision forecast the BOJ would approve loans of two years or longer or said such a move was possible.
Traders cut bets the ECB would lower borrowing costs after Governing Council member Jozef Makuch told reporters in Bratislava there was no need to discuss rate options now.
The implied yield on Euribor futures expiring in December 2014 climbed four basis points to 0.655 percent.
The ECB’s Outright Monetary Transactions program, introduced last year amid concern the euro-area would unravel, is being reviewed by the court in Karlsruhe this week after plaintiffs including a lawmaker allied to German Chancellor Angela Merkel brought a case against it. The OMT allows potentially unlimited purchases of bonds of debt-stricken countries that sign up to adjustment programs.
“I have full confidence in the constitutional court’s independence, also in its ability to examine with thoroughness and with fairness all the advice it is getting from all sides,” Draghi said in an interview on German ZDF television.
Draghi said that in the event that OMT was ever used, it would only target the parts of the yield curve that aren’t in line with fundamentals.
The extra yield investors demand to hold Portugal’s 10-year bonds instead of German bunds widened 24 basis points to 4.86 percentage points. The spread between Irish and German 10-year rates expanded 14 basis points to 2.62 percentage points.
Draghi’s “statement didn’t help sentiment toward those credits,” said Christoph Rieger, head of fixed-rate strategy and Commerzbank AG in Frankfurt. “Taking it into context and the way he said it, it’s really nothing to get alarmed about. I don’t think that this bearish spread widening that we’re seeing at the moment is sustainable.”
Volatility on Greek bonds was the highest in euro-area markets today followed by those of Portugal and Belgium, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
“No potential buyer wants to stand in the way of the tide of selling,” Ciaran O’Hagan, head of European rates strategy in Paris, wrote today in an e-mailed comment. “Should spreads stabilize over the coming days” we would look to add Portuguese government securities, he wrote.
The nation sold 805 million euros of inflation-linked debt maturing in 2023 at an average yield of 0.06 percent. The Netherlands sold 2.65 billion euros of 2016 securities at an average yield of 0.495 percent, its debt agency said.
Slovenian bonds declined, pushing the yield on the 5.5 percent dollar-denominated security due in October 2022 up eight basis points to 6.40 percent.
German bunds handed investors a loss of 1.2 percent this year through yesterday, according to the Bloomberg Germany Sovereign Bond Index. (BGER) Separate indexes show Greek bonds returned 32 percent, Ireland’s gained 6.1 percent, Spain’s rose 5.8 percent and Italian bonds rose 3 percent.