Italian bonds rose, pushing two-year yields to the lowest in 10 months, amid speculation a second offer of unlimited three-year loans by the European Central Bank this week will boost demand for the securities.
Spanish two-year notes gained for a ninth day even as ECB Governing Council member Ewald Nowotny said he wanted to warn against the idea the so-called longer-term refinancing operation would become “a regular feature” of policy. Italy’s 10-year bonds climbed for a third day after the nation’s borrowing costs declined as it sold 6.25 billion euros ($8.4 billion) of debt. German bunds gained after a U.S. report showed orders for durable goods declined, underpinning demand for safer assets.
“Investors are positioning for a huge pick-up in the LTRO, especially from the Italian and Spanish banks,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “The area that will likely benefit more is the two-and three-year sector.”
The Italian two-year yield fell 21 basis points, or 0.21 percentage point, to 2.45 percent at 4:41 p.m. London time, the lowest level since April 7. The 2.25 percent note due November 2013 gained 0.335, or 3.35 euros per 1,000-euro face-amount, to 99.705.
Italy’s 10-year bond yield declined seven basis points to 5.35 percent. The extra yield, or spread, investors demand to hold the 10-year securities over two-year notes increased 15 basis points to 293 basis points, the widest since June 2009.
Spain’s two-year yield dropped eight basis points to 2.44 percent.
European banks will probably tap the Frankfurt-based ECB for 470 billion euros in three-year loans, according to a Bloomberg News survey before the funds are allotted tomorrow. Banks borrowed 489 billion euros at the first operation Dec. 21.
Spanish and Italian bonds were buoyed after the ECB’s first LTRO on speculation some of the money was recycled into the two nations’ debt markets. They were also boosted as the central bank was said to buy the securities. There’s no need for the ECB to intervene in bond markets and the program has not been active in past weeks, Nowotny said today in London.
Italy’s Treasury sold 3.75 billion euros of a new 10-year bond at a yield of 5.5 percent, the lowest since September and down from 6.08 percent at the previous auction of similar-maturity debt on Jan. 30.
The government also sold 2.5 billion euros of 2017 securities to yield 4.19 percent, versus 5.39 percent at the prior auction on Jan. 30. The sale will help the Treasury cover 37 billion euros in bonds maturing this week.
“The curve remains very steep, and thus offers Italian banks and fund managers very attractive carry,” Marc Ostwald, a strategist at Monument Securities Ltd. in London, wrote in a research note to clients. “Italy and the euro zone are by no means out of the woods yet, so this is again a battle won in a long ongoing war.”
Germany’s 10-year yields fell to a three-week low after the U.S. Commerce Department said bookings for goods meant to last at least three years slumped 4 percent in January. Economists projected a 1 percent decline, a Bloomberg survey showed.
Bunds also gained after Standard & Poor’s cut Greece’s credit rating yesterday to “Selective Default” from CC.
The German 10-year yields fell three basis points to 1.80 percent after touching 1.78 percent, the lowest since Jan. 31. Two-year yields were little changed at 0.2 percent.
The yield on Greece’s benchmark bond maturing in October 2022 fell for the first time in three days, dropping 41 basis points to 34.37 percent. The price climbed to 20.55 percent of face value.
Volatility in Greek debt was the highest in euro-area markets, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.
Italian bonds returned 9.7 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds gained 2.6 percent and German bonds were little changed.
Switzerland sold 803 million francs ($894 million) of bills maturing on May 31 at a negative rate of 0.099 percent today. Investors have favored AAA rated Switzerland’s assets as a refuge from the sovereign debt crisis, prompting the nation’s central bank to impose a cap on the Swiss franc last year after the currency strengthened to a record versus the euro.