Spanish 2-Year Notes Advance a Fourth Day on Bailout Bets

Spain’s two-year notes advanced for a fourth day on speculation the nation will request a sovereign bailout that would trigger European Central Bank purchases of its government debt.

Spanish 10-year bonds outperformed most of their euro-region peers, pushing yields to a six-week low. German 10-year bonds headed for the biggest weekly decline this month after Chancellor Angela Merkel signaled support for the ECB’s plan to insist on conditions in exchange for helping reduce indebted countries’ borrowing costs. Spain’s two-year yield may drop to 2 percent with ECB purchases, said Steven Major, HSBC Holdings Plc’s head of fixed-income research.

ECB buying “would reinforce the rally in Spanish bonds,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets in Edinburgh. “Given the fragile position of the Spanish economy, it looks almost inevitable Spain will require a bailout.” Shorter-term securities are the “most attractive” maturities, he said.

Spain’s two-year note yield slid 22 basis points, or 0.22 percentage point, to 3.77 percent at 5:39 p.m. London time, after reaching 3.72 percent, the lowest level since Aug. 7. The yield has fallen 43 basis points this week. The 4.75 percent security due July 2014 rose 0.4, or 4 euros per 1,000-euro ($1,230) face amount, to 101.795.

‘Time is Pressing’

Spain’s 10-year yield dropped eight basis points to 6.44 percent, the least since July 5. The 10-year bund yield fell three basis points to 1.50 percent, leaving it 11 basis points higher in the week.

“Obviously time is pressing” on stamping out the debt crisis, though “on many of these issues we feel we’re on the right track,” Merkel told reporters in Ottawa at a joint press conference with Canadian Prime Minister Stephen Harper yesterday. Euro-area policy makers “feel committed to do everything we can to maintain the common currency.”

The Stoxx Europe 600 Index rose 0.6 percent, heading for its 11th weekly rally. The euro weakened 0.3 percent to $1.2323.

ECB President Mario Draghi said on Aug. 2 that the central bank may buy government debt in unison with the region’s bailout funds to address elevated yields that are “related to fears of the reversibility of the euro.”

Spanish Prime Minister Mariano Rajoy said the next day he would consider triggering the mechanism if it were in the “best interests of Spaniards,” comments he reiterated on Aug. 14.

Note Yields

“Two percent would be reasonable for a two-year Spanish bond if the ECB decides it should go there,” HSBC’s Major said in an interview on Bloomberg Television’s “The Pulse” with Maryam Nemazee. “It’s all about getting those front-end yields stapled to the floor,” he said, referring to shorter-maturity government debt.

The additional yield investors demand to hold Spanish 10-year bonds over the notes rose for a second day, increasing 11 basis points to 272 basis points. The spread widened to a record 343 basis points on Aug. 6.

Spanish debt was the most volatile in euro-area markets today, followed by Germany and Portugal, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit default swaps.

Portugal’s 10-year bond climbed for the 16th time in 17 days, pushing the yield down nine basis points to 9.76 percent. That’s the lowest in seven weeks.

Germany’s Chancellor Angela Merkel is considering easing Greece’s bailout terms, two German lawmakers said.

Greece’s bond maturing in February 2023 advanced, pushing the yield down 24 basis points to 24.38 percent. The price climbed 0.30 to 19.78 percent of face value.

German debt returned 2.8 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 3.3 percent and Italy’s handed investors 10 percent.

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