Spanish Notes Rise on Collateral Speculation; French Bonds Drop

Spanish two-year notes rose for a seventh day, the longest streak of gains in more than a year, on speculation banks bought the debt to use as collateral when the European Central Bank starts offering three-year loans tomorrow.

France’s 10-year bonds fell for the first time in five days as the nation sold 7 billion euros ($9.1 billion) in Treasury bills after Fitch Ratings lowered its credit outlook. Belgium’s two-year notes trimmed six days of gains after its rating was cut two levels to Aa3 by Moody’s Investors Service on Dec. 16. When the ECB starts its longer-term refinancing operation tomorrow, banks can borrow unlimited funds in return for eligible collateral, including euro-region government bonds.

“The three-year long-term refinancing operation from the ECB will be the major event for the market this week,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “The focus will be on how popular it is going to be and you may see banks buying up some of the short end of the peripherals to use at the operations.”

Spain’s two-year note yields fell eight basis points, or 0.08 percentage point, to 3.38 percent at 4:22 p.m. London time. They have dropped 155 basis points in the past seven trading days, the longest run of declines since October 2010. The 2.5 percent security due October 2013 rose 0.15, or 1.50 euros per 1,000-euro ($1,302) face amount, to 98.445. The nation’s 10-year yield declined 14 basis points to 5.17 percent.

Rating Outlook

Italian two-year note yields dropped below 5 percent for the first time since Nov. 1, declining as much as 33 basis points to 4.96 percent before settling at 5.16 percent. The 10-year yield fell 18 basis points to 6.83 percent.

The ECB is resisting pressure to increase bond purchases, saying governments need to find a lasting solution to the sovereign-debt crisis. It has spent 211 billion euros on government bonds since its program started in May last year and settled 635 million euros of purchases in the week through Dec. 9, the smallest amount since it resumed its market interventions in August. The ECB said today it settled 3.36 billion euros of purchases in the week through Dec. 16.

The Frankfurt-based central bank has instead focused on helping the banking industry with measures including tomorrow’s offer of unlimited three-year loans. It’s up to the banks to decide what to do with the money, ECB President Mario Draghi told the Financial Times in an interview conducted on Dec. 14.

ECB Loans

“One of the things that they may do is to buy sovereign bonds,” Draghi said. “But it is just one. And it is obviously not at all an equivalent to the ECB stepping up bond buying.”

ECB Vice President Vitor Constancio said he expects “significant” demand for the bank’s three-year loans.

“It’s an important instrument for banks,” Constancio told Bloomberg Television in an interview in Frankfurt today. “They face very high refinancing needs early next year related to the repayment of medium-term debt.”

Fitch on Dec. 16 revised its outlook for the credit grades of Belgium, Spain, Slovenia, Italy, Ireland and Cyprus to negative and said France is more exposed to the crisis than other top-rated euro-region countries.

France’s 10-year bond yields rose four basis points to 3.10 percent, while its two-year note yields climbed seven basis points to 0.98 percent.

French ‘Concern’

“There’s clearly a concern that it’s just a matter of time before France is downgraded,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “That’s making investors pretty cautious on France,” which is weighing on the bonds, he said.

France sold 3.5 billion euros of debt due March 15 2012 at an average yield of 0.005 percent. Investors bid for 2.6 times the amount of bills allotted. That compares with a so-called bid-to-cover of 1.7 times at the previous auction of similar-maturity securities held Dec. 12, which were sold at 0.222 percent.

The nation also sold 1 billion euros of 175-day bills, 1.5 billion euros of 329-day bills and 1 billion euros of 56 day bills.

Belgium’s two-year note yields climbed nine basis points to 2.68 percent, while its 10-year yields advanced eight basis points to 4.38 percent.

Greece is scheduled to sell 1 billion euros of three-month bills tomorrow, while Spain is due to auction three- and six-month securities.

Conference Call

Euro-area finance ministers were scheduled to begin a conference call at 3:30 p.m. Brussels time to discuss 200 billion euros in additional funding through the International Monetary Fund and the mechanics of a so-called fiscal compact that was negotiated at a Dec. 9 European Union summit, according to two people familiar with the planning.

Volatility on Austrian and Spanish debt was the highest among euro-area nations tracked by Bloomberg today, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. The yield difference between Austria’s two-year and 10-year securities moved 1.5 times the 90-day average, the gauge showed.

German two-year note yields fell one basis point to a record low 0.207 percent. Ten-year bund yields rose three basis points to 1.88 percent. They have dropped about one percentage point this year as the euro-area sovereign-debt crisis intensified, boosting investment in the region’s benchmark securities.

German bonds have handed investors a 2.8 percent gain so far this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, boosting year-to-date returns to 9.5 percent. French bonds have returned 4.8 percent this year, the indexes show, while Spain’s have gained 5.4 percent.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE