Spanish and Italian bonds tumbled as the European Central Bank refrained from announcing any additional steps to cap debt yields in the two nations after cutting its benchmark interest rate to a record low.
Spain’s 10-year yields climbed the most in the euro era after the nation’s borrowing costs increased at an auction amid concern the debt crisis is worsening. German two-year notes rose as the ECB also cut its deposit rate to zero to revive the region’s economy. Speaking in Frankfurt after the decision, ECB President Mario Draghi said the council didn’t discuss other non-standard tools. Spanish and Italian bonds jumped last week after euro-area leaders expanded steps to combat the turmoil.
“The market was slightly disappointed as it hoped for the ECB to announce further steps to address the crisis,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “The ECB may want to keep pressure on politicians to do their jobs. Our preference remains on core bonds as we expect the situation in the peripheral markets to deteriorate in the next few months.”
The Spanish 10-year yield climbed 37 basis points, or 0.37 percentage point, to 6.78 percent at 5 p.m. in London after rising 43 basis points, the biggest increase since August 1994. The 5.85 percent bond due in January 2022 dropped 2.45, or 24.50 euros per 1,000-euro ($1,240) face amount, to 93.59.
Italy’s 10-year bond yield increased 21 basis points to 5.98 percent. It earlier climbed to 6.04 percent, the first time it has breached the 6 percent level since June 29.
The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity German bunds widened 44 basis points to 539 basis points. The spread for Italy expanded 28 basis points to 460 basis points.
The ECB lowered its main refinancing rate by 25 basis points to a record 0.75 percent, as forecast by 49 of 64 economists in a Bloomberg News survey. Ten predicted no change, and five forecast a decline to 0.5 percent.
“Downside risks to the euro-area economic outlook have materialized,” Draghi told reporters. “Economic growth in the euro area continues to remain weak with heightened uncertainty weighing on both confidence and sentiment.”
Draghi said he couldn’t see any other measures that would be effective in a “highly fragmented market.”
Spain sold its benchmark 10-year bond at an average yield of 6.43 percent, compared with 6.044 percent when the securities were last auctioned on June 7. The nation also sold debt maturing in July 2015 and October 2016. Demand for the three-year notes was 2.28 times the amount sold, down from 3.18 times in June.
“There’s still a lot of uncertainty for peripheral bonds and Draghi made that clear today,” said Ciaran O’Hagan, head of European rate strategy at Societe Generale SA in Paris. “Draghi’s comments illustrate that the economic outlook has worsened and that details of last week’s summit accord still need to be worked out between sovereigns.”
Germany’s two-year note yield dropped six basis points to 0.02 percent. The 10-year yield fell seven basis points to 1.38 percent, the lowest level since June 12.
German bonds have returned 2.7 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities declined 3.6 percent, and Italian debt gained 9.3 percent.
“Draghi made it very clear the ECB is concerned about the downside risk in the euro-zone economy,” said Michiel de Bruin, who oversees $30 billion as head of euro government bonds at F&C Netherlands in Amsterdam. “This should continue to underpin demand for safety, and benefit core bonds like German bunds.”
The case for lower interest rates was buoyed by a report from the European Union’s statistics office on July 2 showing euro-area unemployment reached the highest on record. Retail sales in Germany, Europe’s biggest economy, fell 0.3 percent in May from the previous month, the Federal Statistics Office in Wiesbaden said June 29.
Euribor interest-rate futures rose, with implied yields on the December contract falling four basis points to 0.42 percent, as traders added to bets borrowing costs will fall further.