Spain and Italy are “potential candidates” for government bond purchases by the European Central Bank as yields increase, BNP Paribas SA said.
Spanish 10-year bonds fell for the fifth day today, pushing the yield four basis points higher to 4.58 percent as of 2:27 a.m. in London, the most since Feb. 4, 2009. The extra yield investors demand to hold the debt instead of benchmark German bunds widened 12 basis points to 196 basis points, the most since 1996, according to generic data compiled by Bloomberg. Italian 10-year yields rose two basis points to 4.30 percent.
“If the current situation persists, the ECB will have no choice but to support these countries, initially with a small buying amount ” Ioannis Sokos, a London-based interest-rate strategist at BNP Paribas, wrote in a research note today. “If this is not enough to prevent selling pressures, then the ECB could proceed with larger purchases. This means that the current situation will have to get worse before it becomes better.”
The ECB began buying government bonds last month to support an almost $1 trillion rescue fund for indebted European Union nations as surging Greek bond yields threatened to infect debt securities from other countries. While Greek, Irish and Portuguese bond yields are below the levels reached before the intervention, Italian and Spanish yields are higher.
“We do not think the Securities Markets Program constitutes good policy, it would make sense to stop it before year-end,” Ciaran O’Hagan, a fixed-income strategist at Societe Generale SA in Paris, wrote in a report today. If central-bank buying does continue, “it would make sense to extend it beyond Irish and Portuguese government bonds,” he wrote.
Concentrating on those markets sets up Spanish and Italian bonds as the “fall guys,” O’Hagan said.