Spain 2-Year Yield Drops Most in 2012 on ECB Buying Speculation

Spanish two-year notes rose this week, pushing down yields the most since December on speculation the European Central Bank will buy shorter-maturity government securities to help quell turmoil in the region’s debt markets.

Spain’s 10-year bond yield slid below 7 percent yesterday, paring a surge after ECB President Mario Draghi initially failed to persuade investors that policy makers would be able to halt the rise in borrowing costs. Spanish Prime Minister Mariano Rajoy said he would consider asking the euro region’s bailout funds to buy Spanish debt .

“Draghi came out yesterday and gave the strong impression that policy makers are going to do something over the next month or so,” said Orlando Green, a fixed-income strategist at Credit Agricole CIB in London. “This is helping to prevent the periphery from cheapening. The market is giving policy makers the benefit of the doubt but the question is, how long can this last?”

Spanish two-year note yields sank 135 basis points, or 1.35 percentage point, to 3.96 percent at 6:05 p.m. London time yesterday, the most since the five-days ended Dec. 2. The 4.75 percent bond due July 2014 climbed 2.50, or 25 euros per 1,000-euro face amount ($1,238) to 101.48.

Spanish government debt has handed investors a loss of 6.3 percent this year according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, with the two-, five- and 10-year rates climbing to record highs on July 25. German debt has returned 4.5 percent and Italy’s rose 6.5 percent.

Italian Gains

Italian bonds also rose in the week with the two-year yield sliding 66 basis points to 3.13 percent. The securities were supported on expectations the ECB will step in to buy them after Draghi said on July 26 that policy makers would do “whatever it takes” within the ECB’s mandate to save the currency bloc. At a news conference in Frankfurt after the ECB’s Aug. 2 meeting he indicated the central bank will buy in sufficient quantities to remove all doubts about the currency bloc.

The German 10-year bund yield rose three basis points to 1.42 percent. It swung between gains and losses through the week amid concern about the nation’s opposition to further debt purchases by the central bank. Members of German Chancellor Angela Merkel’s coalition parties signaled on Deutschlandfunk radio yesterday that they won’t stand in the way of Draghi’s plans

Germany will auction 4 billion euros of 10-year debt on Aug. 8.

“The assumption is the volatility that we’ve seen this week is likely to continue,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “Next week is a bit of a dead-zone in terms of data. The lessons of the last two years are to be inordinately careful.”

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