German Bund Yields 2 Basis Points From Week Low on G-20

Italian two-year notes surged, pushing the yield to the least in almost 11 months, as borrowing costs fell at a sale of bills before the European Central Bank’s second round of three-year loans to financial institutions.

Spanish two-year notes gained for an eighth day, their longest run of advances since December. The ECB is due to allocate banks unlimited cash in its second longer-term refinancing operation in two days’ time. Germany’s 10-year bond yields slid to the lowest in more than a week as Moody’s Investors Service said the risk of Greece defaulting is high and Chancellor Angela Merkel said there is no quick solution to the debt crisis.

“Italy is leading the way higher before the LTRO later this week, people are thinking that there will be significant take-up and that this will be parked in the front end of the Italian and Spanish curves,” said Richard McGuire, a strategist at Rabobank International in London. “The positive sentiment has also been aided by the successful bill auction.”

The Italian two-year note yield slid 15 basis points, or 0.15 percentage point, to 2.68 percent at 4:26 p.m. London time. It reached 2.63 percent, the least since April 7. The 2.25 percent note due November 2013 gained 0.235 or 2.35 euros per 1,000-euro ($1,341) face amount, to 99.33 percent. Spain’s two-year yield fell nine basis points to 2.51 percent.

Italian Auction

Italy’s Treasury auctioned 8.75 billion euros of 184-day bills at 1.202 percent, the lowest yield since September 2010, and down from 1.969 percent at the last auction of similar-maturity securities on Jan. 27. Investors bid for 1.36 times the amount offered, compared with 1.35 times last month. The Treasury also sold 3.5 billion euros of 295-day bills at 1.29 percent.

Italy’s government note yields have dropped about 3.50 percentage points since the ECB announced its plan to offer unlimited three-year loans on Dec. 8, amid speculation that banks are buying the securities to use them for collateral with the central bank. Spain’s two-year note yields have dropped 2.4 percentage points over the same period.

Using the operations, banks can borrow from the ECB at around 1 percent and invest the proceeds in securities such as the 10-year Italian government bond, currently yielding 5.43 percent.

Bank Loans

Banks took 489 billion euros at the first of the ECB’s operations in December and will seek 470 billion euros on Feb. 29, according to the median estimate of 28 analysts surveyed by Bloomberg.

“The ECB’s LTRO should improve sentiment, unless the figure is lower than expected,” said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt.

The Frankfurt-based ECB said today it hasn’t bought any government bonds for two straight weeks. Purchases have dropped since the ECB funneled cash into the banking system with the three-year loans, reducing the need to intervene with its Securities Markets Program.

The yield on the German 10-year bond fell six basis points to 1.82 percent, after slipping to 1.81 percent, the least since Feb. 2.

European Commission President Jose Barroso said today he expects “no decision” to be reached during a March 1-2 European Union summit on whether to combine the region’s rescue funds and produce a potential firewall of 750 billion euros.

G-20 Rebuff

“There’s no need now for a debate on increasing the capacity” of the temporary and permanent bailout funds, Merkel told lawmakers in Berlin today.

A European review of the arrangements is “essential” before any consideration can be made to boost outside support to aid the debt crisis, the Group of 20 nations said in a statement yesterday after a meeting of finance ministers.

Greece’s benchmark bond yields rose to a euro-era record today after Moody’s Investors Service said the risk of the nation defaulting “remains high.”

Europe’s most-indebted nation formally asked investors to exchange their holdings of government debt for new securities last week as part of a new bailout deal. Greece’s central government debt stood at 368 billion euros at the end of December, compared with 360.4 billion euros at the end of September, according to a statement posted on the Athens-based Finance Ministry’s website on Feb. 24.

“The risk of a default even after this distressed exchange is completed remains high,” Moody’s said in its weekly credit outlook published today. There is still a chance that private-sector creditors won’t agree to a debt swap, it said.

Greece’s October 2022 bond rate was 54 basis points higher at 34.77 percent after reaching a euro-era record 36.52 percent, according to Bloomberg generic data.

Greek bonds have handed investors a loss of 6.9 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities have returned 2.3 percent in 2012, while Italian bonds jumped 9.3 percent. German debt is little changed, after rising 9.7 percent in 2011, the indexes show.

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