Italian and Spanish bonds surged, driving yields down the most since the euro began in 1999, as the European Central Bank bought the debt to stop the fiscal crisis infecting the area’s third- and fourth-largest economies.
The extra yield investors demand to hold bonds from Spain and Italy instead of German bunds narrowed as four people with knowledge of the transactions said the ECB purchased the nations’ debt. It also bought Irish and Portuguese securities, two people said. Belgian securities also climbed relative to bunds on optimism the measures may stem contagion. German bonds rose as stocks dropped amid concern global growth is slowing.
The ECB’s purchases are “a confidence builder, and the fact that they are stepping in is causing some people to review their stance on some of the countries,” said Rasmus Rousing, a fixed-income strategist at Credit Suisse Group AG in Zurich. “They are showing their commitment not to let spreads widen beyond a certain threshold.”
The yield on 10-year Italian bonds tumbled 80 basis points to 5.29 percent at 4:10 p.m. in London. The 4.75 percent securities maturing in September 2021 jumped 5.7, or 57 euros per 1,000-euro ($1,422) face amount, to 96.32. That narrowed the difference in yield, or spread, to similar-maturity German debt by 73 basis points to 301 basis points. The yield on two-year Italian notes dropped 92 basis points to 3.60 percent.
Italy is the euro area’s biggest bond market, with 1.8 trillion euros of outstanding debt as of Dec. 31, compared with 1.1 trillion euros of German debt outstanding on June 30, according to websites from the nations’ debt agencies.
The Frankfurt-based central bank’s Governing Council held an emergency conference call yesterday, before saying it intends to “actively implement” its bond-purchase program. Group of Seven finance ministers and central bank governors also pledged in a statement to “take all necessary measures to support financial stability and growth” as the U.S. had its credit ranking cut one level to AA+ by Standard & Poor’s on Aug. 5.
ECB President Jean-Claude Trichet detailed the steps Italy must take to overhaul its economy in a letter sent last week to Prime Minister Silvio Berlusconi, Corriere della Sera reported today. The Italian leader pledged further austerity and to balance Italy’s budget in 2013 on Aug. 5. Spanish Prime Minister Jose Luis Rodriguez Zapatero also spoke with euro-area peers last week and agreed to press to implement accords adopted at the July 21 summit as soon as possible.
The yield spread between Spanish and German 10-year bonds narrowed 81 basis points to 289 basis points, or 2.89 percentage points, as the yield on the Spanish securities dropped 88 basis points to 5.17 percent. The Spanish two-year note yield sank 108 basis points to 3.27 percent.
The Belgian-German 10-year spread narrowed nine basis points to 202 basis points. The Markit iTraxx SovX Western Europe Index of credit-default swaps linked to the debt of 15 governments dropped six basis points to 280, according to Markit Group Ltd.
The ECB purchases will need to be sustained to have a lasting effect on Italian and Spanish debt, said Glenn Marci, a strategist at DZ Bank AG in Frankfurt.
Italian 10-year yields rose to euro-era records last week even after they dropped 26 basis points to 5.34 percent on July 21, when European leaders expanded aid for Greece and German Deputy Foreign Minister Werner Hoyer said his country may not resist joining common bonds in the euro area forever. Spanish 10-year yields also climbed to euro-era highs.
“There are some people hoping this will be the magic bullet, but I’m not sure the ECB will keep buying at a scale that will influence markets on a sustainable basis,” Marci said.
The yield on the benchmark 10-year German bund was five basis points lower at 2.30 percent. Yields earlier rose as much as 19 basis points to 2.53 percent, the biggest increase since May 10, 2010, when the ECB began buying the bonds of the region’s most indebted nations.
The additional yield investors demand to hold French 10-year bonds instead of benchmark German debt increased seven basis points to 88 basis points.
The securities dropped as stocks declined and a German deputy government spokesman said the nation didn’t see any additional measures being taken to resolve the crisis beyond those agreed upon at the July summit. The agreement didn’t boost the size of the European Financial Stability Facility, he said.
“Equities are trading toward the lows of the day, and that’s accounted for much of the reversal of that initial uptick in yields,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “Secondly and most importantly and unsurprisingly, we are starting off with more contradictions. It’s going to remain extremely choppy.”
European investor confidence had its steepest decline on record in August, Sentix said. An index measuring sentiment in the 17-nation euro region fell to minus 13.5 from 5.3 in July, the Limburg, Germany-based research institute said today.
German government bonds handed investors 4.5 percent this year, compared with 5.4 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds have returned 0.1 percent, while Italian debt earned a 4.4 percent loss.