Spanish and Italian bonds slid as Italy’s Prime Minister said the nation will not ask the European rescue fund to buy its bonds and as the region’s central bank failed to persuade investors it can stem the debt crisis.
German government bonds jumped and Spanish 10-year yields climbed over the 7 percent level that triggered bailouts of Greece, Ireland and Portugal. European Central Bank President Mario Draghi signaled the ECB intends to join with governments to purchase debt to bring down borrowing costs. German, Dutch, and Finnish two-year yields dropped to records as investors favored safer assets.
“There were expectations that Spain and Italy would signal they are willing to ask for aid” today, said Mohit Kumar, head of European fixed-income strategy at Deutsche Bank AG in London. “When that didn’t happen there was disappointment and you saw the bonds selling off. It’s only a matter of a few days or a few weeks until Spain asks for a bond-buying program.”
Spain’s 10-year bond yield surged 43 basis points, or 0.43 percentage point, to 7.17 percent at 5 p.m. London time. The 5.85 percent bond due January 2022 tumbled 2.795, or 27.95 euros per 1,000-euro ($1,215) face amount, to 91.12.
Similar-maturity Italian yields jumped 40 basis points to 6.33 percent. They earlier fell as much as 20 basis points.
“Any consideration in that sense is premature,” Mario Monti told reporters in Madrid after meeting Spanish premier Mariano Rajoy. “Our intention is to work with the other governments so that Europe has that instrument and solid finances,” he said.
While Rajoy today welcomed Draghi’s comments, he declined to say whether Spain will ask the bailout fund to buy its bonds.
The German 10-year yield dropped 14 basis points to 1.23 percent after earlier rising as much as six basis points. The two-year yield declined one basis point to minus 0.089 percent after falling to 0.097 percent, matching a record low.
Speaking in Frankfurt after the central bank left its benchmark interest rate unchanged at 0.75 percent, Draghi told reporters that ECB bond purchases would probably focus on shorter-maturities and wouldn’t break European Union rules prohibiting the financing of government deficits.
“All we have had so far from Draghi are words, no actions,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Nothing structural is being presented, other than possibilities, which are down the line.”
The euro strengthened to a four-week high of $1.2405 as Draghi began his press conference, before sliding through $1.22 less than 30 minutes later.
“The first reaction was positive when Draghi announced that the ECB could imagine buying bonds,” said Christian Lenk, an analyst at DZ Bank AG in Frankfurt. “The market had hoped for more, for a concrete number that they would buy, and now things are turning around. The volatility shows a bit of disappointment.”
Draghi disappointed investors by not offering more concrete steps, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said in an interview with Betty Liu on Bloomberg Television’s “In the Loop.”
“We were hoping for, at least temporarily, some type of specific effort on the part of the central banks,” said Gross, whose company is based in Newport Beach, California.
Draghi said last week that policy makers would do “whatever it takes” within the ECB’s mandate to save the currency bloc.
“Draghi created unrealistic expectations among investors but failed to announce concrete measures significant enough to reassure investors,” said Stephanie Kretz, a strategist in London at Lombard Odier Darier Hentsch & Cie., which manages $174 billion. “One unintended consequence might be that next time the ECB wants to calm markets, his words won’t carry the same effect.”
Spain’s bonds rose earlier as the nation sold 3.13 billion euros of bonds, more than the maximum target of 3 billion euros.
The Treasury in Madrid auctioned 10-year bonds at an average yield of 6.647 percent, compared with 6.43 percent at the previous sale on July 5. Spain also sold notes maturing in October 2016 and July 2014.
Volatility on Spanish bonds was the highest in euro-area markets today, followed by Italy and the Netherlands, according to measures of 10-year debt, the spread between two- and 10-year securities and credit-default swaps.
Portuguese 10-year bonds stayed higher after Standard & Poor’s affirmed the nation’s credit ratings. The outlook on the nation’s BB long-term ranking and B short-term classification remains negative, the ratings company said.
The yield on Portugal’s 10-year bond declined three basis points to 11.04 percent.
German debt has returned 3.6 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds dropped 4.7 percent, while Italy’s debt rose 8.1 percent.