Spanish Bonds Fall Before Auction After ECB Rally Fails to Hold

Italian, Spanish Bonds Rise After ECB Said to Buy Securities
The ECB bought larger-than-usual sizes and quantities of the Italian debt, said two people with knowledge of the trades. Photographer: Alessia Pierdomenico/Bloomberg

Spanish 10-year bonds fell for a third day amid speculation yields will surge at tomorrow’s auction of up to 4 billion euros ($5.4 billion) of securities due in January 2022.

The difference in yield between 10-year Italian bonds and German bunds stayed at more than 5 percentage points for a second day as the securities failed to hold an earlier advance after the European Central Bank was said to step up purchases of the nation’s debt. German bonds fell after the nation got fewer bids than the maximum sales target in an auction of two-year notes, and Chancellor Angela Merkel said the country is ready to cede some sovereignty to strengthen the euro area.

“There’s still no credible backstop for Italy and Spain and the ECB buying on the current scale is just far too small to have any impact,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “There’s a Spanish auction tomorrow, which will be a pretty clear test of appetite. The yield level is likely to be pretty punitive.”

The yield on 10-year Spanish bonds rose six basis points to 6.40 percent at 4:11 p.m. London time, after earlier dropping 11 basis points to 6.22 percent. The 5.5 percent securities maturing in April 2021 fell 0.42, or 4.2 euros per 1,000-euro face amount, to 93.73.

Italian 10-year bond yields fell nine basis points to 6.98 percent after the ECB was said by two people with knowledge of the trades to have bought larger-than-usual sizes and quantities of the nation’s debt under its Securities Market Program today. It also bought Spanish bonds, the people said. A spokesman for the ECB in Frankfurt declined to comment.

‘No Real Buyers’

The difference in yield between Italian and German 10-year bonds was 16 basis points narrower at 513 basis points.

“The European bond market is becoming very binary, and ECB-dependent,” said Mohit Kumar, head of European interest-rate strategy at Deutsche Bank AG in London. “Whenever the ECB steps in, the market likes it, when it steps back, you see pressure. There are no real buyers.”

The ECB said two days ago that it bought fewer bonds last week, settling 4.48 billion euros of purchases through Nov. 11, from 9.5 billion euros the week before. The central bank is resisting pressure to backstop the currency region and combat the crisis by printing money as leaders struggle to lower debt burdens and restore investor confidence. ECB council member Yves Mersch told CNBC in an interview broadcast today that some of the measures the central bank has taken are “limited in time.”

‘Frozen’ Markets

Spreads between bid and offers on government bonds indicate markets are “frozen,” Franco Passacantando, Bank of Italy’s managing director for central banking, markets and payment system in Milan said today. The ECB is “almost exclusively buying Spanish and Italian bonds,” he added.

The sovereign bond market is “very illiquid” and volatility is “enormous,” Dutch Finance Minister Jan Kees de Jager said in parliament in The Hague today.

“The most worrying thing at the moment is how poor liquidity has got,” said Citigroup’s Searle. “Liquidity is obviously very poor, deep into the core” AAA rated nations, he said.

The French-German 10-year yield spread reached a euro-era record 193 basis points today, before narrowing to 187 basis points.

France’s bond spreads are “worrying,” Maria Cannata, head of Italy’s debt agency, said in Milan today. The crisis of confidence in the debt markets is European, not just Italian, and the loss of investor confidence in Europe’s sovereign debt will take a long time to overcome, she said.

Basis Swap

Money-market metrics indicated financial-market stress in the euro area is rising. The cost for European banks to fund in dollars rose to a three-year high. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 125.9 basis points below the euro interbank offered rate, from minus 119.5 yesterday, data compiled by Bloomberg show.

Greek two-year note yields climbed 376 basis points to 114.19 percent after reaching a record 115.49 percent.

Former European Union Commissioner Mario Monti will lead an unelected Italian government and serve as finance minister, he told President Giorgio Napolitano today, as the nation seeks to prevent the economy from succumbing to the debt crisis.

European Commission President Jose Barroso said the euro region faced a “truly systemic crisis” and Europe’s partners were justified in demanding a bolder reaction. Veto powers of individual euro-area governments over common decisions had slowed Europe’s response, he said in an EU Parliament debate today.

Treaty Changes

European Union treaty changes to strengthen EU institutions and patrol tighter budget rules are needed “to make the euro zone more crisis-proof,” Merkel told reporters in Berlin today at a joint briefing with Irish Prime Minister Enda Kenny.

Germany drew bids for 5.455 billion euros of the two-year notes on sale today, less than the 6 billion euros available, according to a Bundesbank statement. The yield was a record-low 0.39 percent, down from 0.46 percent at the previous sale of two-year notes on Oct. 5. The 10-year bund yield increased three basis points to 1.81 percent.

German government bonds have returned 9.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian debt handed investors a 10 percent loss, while Spanish securities lost 1 percent, the indexes show.

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