Spanish Bonds Advance on Speculation ECB to Resume Bond Buying

Spain’s government bonds rose for a fourth day on speculation euro-region policy makers will resume purchases of so-called peripheral debt to help contain surging borrowing costs and ease the debt crisis.

German two-year yields dropped to a record after a report showed euro-area confidence worsened in July, underpinning demand for safer assets. Italian bonds fell as the nation sold 5.48 billion euros ($6.71 billion) of notes. European Central Bank President Mario Draghi, who last week pledged to do whatever it takes to preserve the euro, is trying to build consensus for a plan to contain borrowing costs in Spain and Italy before policy makers meet on Aug. 2.

“The main driver of Spanish and Italian bonds is the hope that we will see some concerted action” to help stem the debt crisis, said Christoph Rieger, head of interest-rate strategy at Commerzbank AG in Frankfurt. “The risk is high that these hopes will be disappointed. We may not get all the details this week and so the market will probably remain volatile.”

Spain’s 10-year bond yield fell 13 basis points, or 0.13 percentage point, to 6.61 percent at 5 p.m. London time, after dropping 52 basis points last week. The 5.85 percent bond due January 2022 rose 0.86, or 8.60 euros per 1,000-euro face amount, to 94.69. The yield climbed to a euro-era record 7.751 percent on July 25.

Draghi’s Approach

Berlin, Paris and Rome have already endorsed Draghi’s approach, echoing his language in saying they will do what’s needed to protect the euro. Draghi meets with U.S. Treasury Secretary Timothy Geithner in Frankfurt this evening and is also attempting to win over Bundesbank President Jens Weidmann, a critic of ECB bond purchases.

“If it’s just the ECB reactivating bond purchases as we saw previously, then I think the market will actually be disappointed because the previous efforts” using the Securities Markets Program were insufficient, Charles Diebel, head of market strategy at Lloyds Banking Group Plc in London, said in an interview on Bloomberg Television’s “The Pulse” with Caroline Hyde. “It needs to be more than that and I think probably policy makers are aware of that.”

Spanish 10-year yields have dropped more than 1 percentage point since Draghi’s pledge to preserve the common currency last week. The decrease in rates has wiped more than 12 billion euros from Spain’s borrowing costs according to implied interest payments calculated by Rabobank.

The euro has strengthened 0.7 percent from its July 25 closing price to $1.2247, and the Stoxx Europe 600 Index of shares has jumped 5.4 percent.

Italian Sale

Italy sold 5.48 billion euros of debt due between 2015 and 2022, near its maximum target of 5.5 billion euros.

The Treasury priced the 10-year bonds to yield 5.96 percent, versus 6.19 percent on June 28. The sale attracted bids for 1.29 times the amount on offer, compared with bid-to-cover ratio of 1.28 percent at the prior auction. The average yield at the five-year sale was 5.29 percent, versus 5.84 percent last month. Italy also sold 2015 notes at a yield of 4.49.

“The relatively low bid-to-cover ratios remain a sign that dealers are extremely suspicious on the recent tightening of EMU periphery’s spreads,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, wrote in an e-mailed note. “The ECB meeting is a few days away and market participants are still reluctant on the possible outcome of the meeting and they seem to be concerned about a possible disappointment.”

German Notes

Italy’s 10-year bond yield increased seven basis points to 6.03 percent after climbing to 6.71 percent on July 25, the highest level since Jan. 16.

The German two-year yield dropped five basis points to minus 0.08 percent after declining to minus 0.096 percent, the lowest since Bloomberg began collecting the data in 1990. The rate was negative for a 17th day, meaning investors who hold the debt to maturity will receive less than they paid to buy them.

An index of executive and consumer sentiment in 17-nation euro area worsened to 87.9 this month from 89.9 in June, the European Commission said in Brussels. That’s the lowest since September 2009. Economists forecast a drop to 88.9, according to a Bloomberg News survey.

German bonds returned 3.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 5.1 percent, and Italy’s debt rose 8.1 percent.

Volatility on Spanish bonds was the highest in euro-area markets today, followed by Ireland and Greece, according to measures of 10-year or similar-maturity debt, the spread between two-year and 10-year securities and credit-default swaps.

Irish bonds due October 2020 rose for a third day, pushing the yield down 10 basis points to 6.14 percent. Greek 10-year securities also advanced, with the rate dropping 116 basis points to 25.57 percent. The price jumped to 18.275 percent of face value.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE