Spanish, Italian Two-Year Notes Drop on ECB Plan, Growth Concern

Spanish and Italian two-year government notes fell for the first time in three weeks amid concern a plan by the European Central Bank to cap the nations’ borrowing costs by buying their debt may founder.

German 10-year bunds snapped a two-week decline as investors sought the safety of Europe’s benchmark securities. Reports showed China’s exports, inflation and industrial production slowed, adding to evidence the global economy is losing steam. Spain and Italy’s two-year notes underperformed their 10-year equivalents.

“Worries have resurfaced in the past few days and seen the core market start to trade a bit better again,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “Europe needs all the help it can get from the stronger global environment and if that fades away it’s going to be even harder for these peripheral markets to dig themselves out of trouble.”

Spanish two-year note yields rose 23 basis points, or 0.23 percentage point, to 4.19 percent at 4:05 p.m. London time yesterday, the first weekly gain since the five days ended July 20. The 4.75 percent bond due July 2014 fell to 101.03.

The Italian two-year rate climbed 26 basis points to 3.39 percent. The securities were boosted along with their Spanish peers in the previous two weeks on speculation the ECB will step in to buy them after President Mario Draghi said in a July 26 speech that policy makers would do “whatever it takes” to save the currency bloc.

Spanish Spread

The additional yield investors demand to hold Spanish 10-year bonds over two-year notes narrowed for four straight days. The spread had widened to a record 343 basis points on Aug. 6 after Draghi last week said any bond purchases would focus “on the short end of the yield curve.”

German 10-year yields slid five basis points this week to 1.38 percent as a report showed inflation in Europe’s largest economy unexpectedly slowed in July. Advance second-quarter data on Aug. 14 is forecast to show the euro-area economy shrank 0.2 percent from the previous three months.

Spanish government debt has handed investors a loss of 4.3 percent this year according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds returned 3.2 percent and Italy’s rose 9.8 percent.

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