Spanish and Italian government bonds surged for a second day amid speculation European leaders are seeking ways to reduce the borrowing costs of the region’s lower-rated nations.
German 10-year bunds slid, sending yields to the highest in six weeks, after French President Francois Hollande said leaders are exploring letting the European Stability Mechanism rescue fund buy debt from countries that have taken fiscal-consolidation steps. Spain’s 10-year rate slipped below 7 percent. Greek bonds stayed lower even as politicians reached an agreement on forming a coalition government.
The prospect of the ESM buying Spanish and Italian bonds “is giving Italy and Spain a short-term boost, but it’s only talk at the moment, there’s nothing concrete,” said Padhraic Garvey, head of developed debt markets at ING Groep NV in Amsterdam. “It looks like it’s going to be discussed at a European level. Longer-term something much more substantial needs to happen.”
Spain’s 10-year bond yield fell 30 basis points, or 0.30 percentage point, to 6.74 percent at 4:41 p.m. London time. It rose to 7.29 percent on June 18, a euro-era high. The 5.85 percent security due January 2022 advanced 1.945, or 19.45 euros per 1,000-euro ($1,269) face amount, to 93.775.
“We’re looking at the ways and means” to use the ESM, the 17-country euro region’s permanent bailout facility, to bring down borrowing costs for “virtuous countries,” Hollande told reporters after a summit of Group-of-20 leaders in Los Cabos, Mexico. A German official said no specific plans for ESM purchases were discussed in Mexico.
The yield on 10-year Italian debt dropped 15 basis points to 5.77 percent and reached 5.73 percent, the least since June 11. The extra-yield investors demand to hold the securities over similar-maturity German bunds narrowed for a second day, declining to 417 basis points.
German 10-year yields jumped eight basis points to 1.61 percent and climbed as high as 1.64 percent, the most since May 3. The two-year yield rose six basis points to 0.15 percent.
Germany auctioned an additional 4 billion euros of 0 percent notes due in June 2014 today. The notes were sold at an average yield of 0.1 percent, up from a record-low 0.07 percent when they were offered on May 23.
Spain will auction as much as 2 billion euros of notes tomorrow after borrowing costs for one year surged to more than 5 percent at a sale of bills yesterday.
Pacific Investment Management Co.’s Andrew Bosomworth said the bond yields of Spain and Italy are unsustainable.
“Both of those countries will go bankrupt eventually if they have to continually refinance themselves at these sorts of levels,” Bosomworth, a money manager at the Newport Beach, California-based company, said in an interview on Bloomberg Television’s “The Pulse” with Maryam Nemazee. “It’s not an easy environment to invest in.”
LCH Clearnet Ltd., Europe’s biggest clearing house, raised the extra deposit it takes from clients to trade most Spanish government bonds yesterday.
The margin needed for Spanish securities due in 10 years to 15 years will be increased to 14.7 percent from 13.6 percent, according to a statement on the company’s website. The rate was also boosted on all Spanish debt due from zero months through seven years.
Volatility on Spanish bonds was the highest in euro-area markets today followed by Ireland, according to measures of 10-year debt, the spread between two- and 10-year securities and credit-default swaps.
Greek 2 percent bonds due February 2023 slipped for a second day, with the yield climbing 74 basis points to 27.17 percent. The price dropped to 16.405 percent of face value.
Evangelos Venizelos, the head of Greece’s Pasok party, said the conditions for the creation of a coalition government between his party, New Democracy and Democratic Left were being met. Antonis Samaras, leader of New Democracy, will be sworn in today as premier, a party official told reporters in Athens.
German debt returned 2.5 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 7 percent, and Italian bonds rose 7.2 percent, the indexes showed.