European government bonds advanced as central bank officials signaled they are open to providing additional emergency loans to banks to keep borrowing costs low.
German 10-year bunds rose for a second day as European Central Bank Governing Council member Ewald Nowotny said policy makers will debate whether more longer-term refinancing operations were needed. Policy maker Benoit Coeure said the discussion was “open,” though there had been no specific talk about what instrument to use. Italy’s 10-year bonds gained for a seventh day, the longest streak since 2010. Bunds were also boosted as business sentiment rose less than analysts forecast.
“European bonds are underpinned by speculation that policy makers will reiterate their stand that more could be done to support the economy,” said Martin Munksgaard, a fixed-income trader at Danske Bank A/S (DANSKE) in Copenhagen. “The Ifo data, while still at a solid level, came in lower than the market expected.”
Germany’s 10-year yield fell six basis points, or 0.06 percentage point, to 1.85 percent at 4:11 p.m. London time after dropping to 1.85 percent, the lowest level since Aug. 30. The 2 percent bund due in August 2023 rose 0.575, or 5.75 euros per 1,000-euro ($1,349) face amount, to 101.31.
The Italian 10-year yield declined four basis points to 4.22 percent after dropping to 4.20 percent, the least since Aug. 16. Similar-maturity Portuguese rates decreased 11 basis points to 4.23 percent.
Whether a new LTRO is needed “is a discussion that we are having in the ECB or that we will have,” Nowotny told reporters in Vienna. “It is definitely important to show the range of our instruments, and that these are flexible.”
ECB President Mario Draghi said yesterday in testimony to the European Parliament in Brussels that he was ready to deploy another LTRO to maintain short-term money markets at a level warranted by the central bank’s assessment of inflation.
Three-month Euribor, the rate at which banks say they can borrow euros, is 0.221 percent, having risen from as low as 0.181 percent in December 2012, according to data from the European Banking Federation.
The ECB flooded financial markets with tranches of three-year loans in December 2011 and February 2012 to avert a credit crunch after banks stopped lending in Europe’s sovereign-debt crisis. Euro-region lenders will repay 7.91 billion euros of the three-year loans this week, the most since May, data released by the ECB on Sept. 20 showed.
“We had dovish central-bank rhetoric yesterday,” said Richard McGuire, senior fixed-income strategist at Rabobank International in London “That means the primary focus today will be on the slew of ECB speeches which will be parsed for any further indications that more stimulus is on the way.”
German bunds also advanced as the Ifo institute said its business climate index, based on a survey of 7,000 executives, climbed to 107.7 from a revised 107.6 in August. That compared with a median forecast of 108 in a Bloomberg News survey.
The Netherlands auctioned 2.35 billion euros of three-year notes at an average yield of 0.435 percent, compared with 0.495 percent at the previous sale on June 11. Spain allotted 3.58 billion euros of bills.
Austrian five-year notes gained for a second day as the nation sold 4 billion euros of new benchmark securities due in October 2018 through banks.
The five-year yield dropped four basis points to 0.94 percent after falling to 0.91 percent on Sept. 19, the lowest level since Aug. 13.
Germany will issue 54 billion euros in bonds and bills in the fourth quarter, the Federal Finance Agency said today in an e-mailed statement. That’s 3 billion euros less than its previous estimate.
Volatility on Germany bonds was the highest in euro-area markets today, followed by those of Austria and Finland, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
German bonds lost 2.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. Dutch securities dropped 2.8 percent, while Italy’s returned 4.5 percent.
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