Italian, Spanish, Irish Bonds Gain, Bunds Drop Before ECB Meets

Italian, Spanish and Irish 10-year bonds rose relative to similar-maturity German government debt as traders speculated the European Central Bank may announce steps tomorrow to stem the spread of Europe’s fiscal crisis.

Bunds slid as stocks rose amid signs the global economic recovery is holding up. Demand fell at a German sale of 4.13 billion euros ($5.4 billion) of five-year notes, while yields climbed at a Portuguese auction of bills. ECB President Jean-Claude Trichet signalled yesterday investors are underestimating policy makers’ determination to shore up the region’s stability after the bonds of high-deficit euro-area nations slumped.

“Markets are reacting to the comments by Trichet that there could potentially be more substantial support from the ECB,” said Steven Mansell, director of interest-rate strategy at Citigroup Global Markets Ltd. in London. “There’s a broad-spread compression of spreads against Germany.”

The yield on 10-year bonds sold by Italy, Europe’s biggest bond market, dropped 17 basis points to 4.53 percent as of 4:43 p.m. in London, narrowing the extra yield investors demand to hold the securities instead of benchmark bunds by 26 basis points to 173 basis points. The yield earlier fell to as low as 4.48 percent, the biggest drop since May 10, when the European Union and the International Monetary Fund announced a backstop for ailing nations worth about $1 trillion.

“I can see there being lots of willing sellers to the ECB at these levels,” Mansell said.

The bund yield advanced 10 basis points to 2.77 percent. The 2.5 percent security maturing in January 2021 fell 0.83, or 8.30 euros per 1,000-euro face amount, to 97.64. The five-year note yield rose nine basis points to 1.77 percent.

Record Levels

Stocks and the euro gained for the first time in four days and Treasuries declined amid optimism the recovery will be able to survive the debt crisis that ravaged Europe’s bond markets and weakened the 16-nation currency. The Stoxx Europe 600 Index climbed 2 percent and the euro rose 0.6 percent to $1.3066.

Concern the European crisis will force more nations to accept aid deepened this week after Ireland followed Greece in requesting a bailout. Ireland’s rescue includes loans from the European Financial Stability Facility at a rate of around 6.05 percent a year.

Declines in bonds from Italy, Spain and Belgium yesterday pushed the yield premiums for the nations’ 10-year bonds to euro-era records over bunds. Spanish 10-year securities rose on just two days last month.

Irish Yields Drop

The ECB bought Irish and Portuguese bonds today, according to at least two traders with knowledge of the transactions, who declined to be identified because the deals are confidential. Central banks bought Irish government bonds yesterday in bigger amounts than they typically do, two people said then.

The Irish 10-year yield plunged 31 basis points to 9.13 percent. Portugal and Ireland led a decline in the cost of insuring against losses on European government debt today, while credit-default swaps on Belgium, Italy, and Spain also fell from record high levels. Belgian 10-year yields were little changed at 4.01 percent.

The yield on similar-maturity Spanish debt fell for the first day in 12, tumbling 24 basis points to 5.33 percent, reducing the yield spread to bunds to 252 basis points, from 283 basis points.

The ECB’s Governing Council will meet tomorrow amid speculation it will again delay its exit from emergency liquidity measures. All 52 economists surveyed by Bloomberg News expect the central bank to leave its benchmark interest rate unchanged at an all-time low of 1 percent.

‘Cheeky Buyer Moment’

“I don’t believe that financial stability in the euro zone could really be called into question,” Trichet told lawmakers in Brussels yesterday. Observers “are tending to underestimate the determination of governments.”

“If the ECB spends even a little money now, it could easily break the log-jam in spreads and tighten them,” Bill Blain, a strategist at Matrix Corporate Capital LLP in London, wrote in a client note today. “We’re approaching a cheeky buyer moment here. We are not saying it’s a long-term investment, but short term the market does look due some upside.”

Portuguese 10-year bonds advanced, with the yield pushed down 30 basis points to 6.77 percent.

Standard & Poor’s yesterday put Portugal’s sovereign-debt ratings on “CreditWatch” with “negative implications.” Portuguese Prime Minister Jose Socrates said his country does not need any aid, Diario Economico reported, citing comments he made following a meeting with exporters in Lisbon.

‘No Place to Hide’

The nation’s borrowing costs increased as it sold 500 million euros of 12-month bills, with yields rising to 5.281 percent from 4.813 percent at a Nov. 17 auction.

“There is no place to hide left for Portugal on the yield curve,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “Yields are at levels that the market is viewing as unsustainable. This should in the end increase the pressure for Portugal to go for a bailout.”

Germany sold 4.13 billion euros of five-year debt, less than the maximum 5 billion on offer, for an average yield of 1.73 percent.

“The overall bid fell short of the targeted amount,” said Schnautz. “When the results were released we got another leg lower” in bund prices, he said.

Signs of global economic strength helped curb demand for German bonds. The Federal Statistics Office in Wiesbaden said today retail sales in the country increased by the most in almost three years in October.

Europe’s manufacturing industries expanded at the fastest pace in four months in November, led by Germany. A gauge in the 16-nation euro area rose to 55.3 from 54.6 in the previous month, London-based Markit Economics said. It had previously reported an increase to 55.5 in November. A reading above 50 indicates expansion.

China’s manufacturing expanded at the fastest pace in seven months in November, according to a report today. U.K. manufacturing last month increased to the fastest pace in 16 years, separate data showed.

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