Spain’s government bonds rose, with 10-year yields dropping the most in seven months, amid speculation the European Central Bank will accelerate efforts to ease the region’s sovereign debt crisis.
Italy’s securities also rallied after German Chancellor Angela Merkel and French President Francois Hollande pledged to do everything to keep the 17-nation currency bloc intact, echoing comments the day before from ECB President Mario Draghi. Germany’s bunds declined after Moody’s Investors Service cut the outlook on the nation’s Aaa rating, citing concern the country will have to support weaker euro-region members. The ECB meets to review monetary policy on Aug. 2.
“A lot of it is down to Mr. Draghi’s comments, which convinced the market that come next Thursday the ECB will be providing us with some support” for bonds, said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “The language he used was pretty forceful. If he fails to deliver on that promise the market is going to make them pay and big time.”
Spain’s 10-year yield fell 52 basis points, or 0.52 percentage point, this week to 6.74 percent at 5 p.m. London time yesterday, the biggest weekly drop since the period ended Dec. 2. The 5.85 percent bond due in January 2012 gained 3.38, or 33.80 euros per 1,000-euro ($1,237) face amount, to 93.83.
The Italian 10-year bond yield declined 21 basis points this week to 5.96 percent after rising to 6.71 percent on July 25, the highest level since Jan. 16.
Germany and France are “bound by the deepest duty” to keep the euro bloc intact, Merkel and Hollande said in a joint statement after they spoke by phone yesterday. The two sought “quick” implementation of resolutions made at a June 28-29 European Union summit, they said.
Draghi said on July 26 that the ECB is ready to do whatever it takes to preserve the single currency. He spoke after yields on Spain’s two-, five-, 10- and 30-year government securities surged above 7 percent this week, the level that spurred Greece, Ireland and Portugal to seek bailouts.
Bunds fell for the first time in four weeks as investors sought higher-yielding assets and Moody’s changed its outlooks on the Aaa credit ratings of Germany, the Netherlands and Luxembourg to negative on July 23, citing an “increasing likelihood” of collective support for countries such as Spain and Italy.
The 10-year bund yield rose 23 basis points this week to 1.40 percent. The yield declined to an all-time low of 1.127 percent on both June 1 and July 23.
ECB policy makers next meet on Aug. 2. They will keep their benchmark interest rate a record low 0.75 percent, according to the median estimate of 53 economists surveyed by Bloomberg News.
Italy plans to sell as much as 5.5 billion euros of notes due from 2015 to 2022 on July 30. Germany will auction 4 billion euros of five-year securities two days later. Spain and Belgium will also sell bonds next week.
“Something really had to be done” before the bond sales, Lloyds’s Wand said. “If we get something decent next week, then it could be something that changes the whole landscape.”