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Spanish, Italian Bonds Rally as Draghi Pledges to Preserve Euro

Spanish and Italian bonds rose for a second day as European Central Bank President Mario Draghi said officials will do whatever it takes to preserve the euro, suggesting policy makers may step in to cap surging debt yields.

Spain’s two-year yield fell the most this month and 10-year rates dropped below 7 percent after Draghi said addressing rising borrowing costs was within the central bank’s mandate. German bunds declined as his comments damped demand for the region’s safest assets. Irish notes advanced, with two-year yields falling below 4 percent, after the government said it would sell new bonds for the first time in almost two years.

“Draghi’s comments are important, especially the phrases that suggest the ECB is contemplating doing something actively to bring down yields for Spain and Italy,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “It takes some of the very sharp pressure off Spanish and Italian yields. Draghi is clearly opening the door to doing something.”

Spain’s two-year note yield fell 76 basis points, or 0.76 percentage point, to 5.66 percent at 4:36 p.m. London time after sliding as much as 79 basis points, the most since June 29. The 4.75 percent note due in July 2014 rose 1.375, or 13.75 euros per 1,000-euro ($1,229) face amount, to 98.33.

Italy’s two-year yield declined 88 basis points to 4.06 percent. It fell to 4.07 percent, the lowest since July 20.

Draghi Comments

Draghi’s comments came amid pressure from Spanish policy makers after the nation’s two-, five-, 10- and 30-year yields all surged above 7 percent yesterday, the level that spurred Greece, Ireland and Portugal to seek bailouts.

“To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate,” Draghi said in a speech today in London. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.”

The bonds of so-called peripheral nations rallied yesterday after ECB council member Ewald Nowotny said there were arguments in favor of giving the region’s bailout fund a banking license, increasing its firepower.

Spain’s Foreign Minister Jose Manuel Garcia-Margallo said today giving the license to the European Stability Mechanism would stop speculation in debt markets, Efe newswire reported. That would give the ESM resources to “extinguish the public debt fire,” the newswire cited him as saying.

Spain’s 10-year yield fell 44 basis points to 6.93 percent after rising to 7.75 percent yesterday, the highest since November 1996. Italy’s 10-year rate declined 39 basis points to 6.06 percent.

‘Very Wary’

“The possibility that a central-bank funded government bond-buying program could at least get discussed will make anyone who’s short peripheral markets very, very wary,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. A short position is a bet an asset will decline.

Ireland’s bonds advanced after the National Treasury Management Agency offered to sell October 2017 notes at a yield of 5.9 percent and October 2020 securities at a yield of 6.1 percent. It also plans to switch bonds due in 2013 and 2014 for those maturing in 2017 and 2020, offering higher yields to investors in return.

“This is good news and clearly illustrates that Ireland’s recovery is on track,” John Hydeskov, chief analyst at Danske Bank A/S in Copenhagen, wrote in an e-mailed note. “We recommend our clients to participate in the operations by the NTMA. Terms and conditions are in our view very favorable.”

Ireland’s two-year note yield dropped 20 basis points to 3.92 percent after falling to 3.79 percent, the lowest level since October 2010.

Italy Auction

Italy sold its maximum target of 2.5 billion euros at an auction of zero-coupon debt due in 2014 today. The sale attracted an a yield of 4.86 percent, the highest since November and investors bid for 1.78 times the amount allotted, versus 1.65 times last month.

Germany’s 10-year bund yield climbed seven basis points to 1.33 percent. It declined to an all-time low of 1.127 percent on June 1 and July 23. The two-year yield rose one basis point to minus 0.051 percent.

A German consumer-sentiment index will increase for a second month to 5.9 in August, from 5.8 in July, GfK SE said in a report today. Economists predicted an unchanged reading, according to a Bloomberg News survey.

German debt returned 4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 8.3 percent, while Italy’s bonds earned 4.8 percent.

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