Spain’s 10-year bonds advanced for the first week this month on speculation the government will request a sovereign bailout that would trigger European Central Bank purchases of its debt.
German 10-year bunds dropped as Chancellor Angela Merkel signaled support for the ECB’s plan to help reduce indebted countries’ borrowing costs and attach conditions to the providing the support. Spanish Prime Minister Mariano Rajoy reiterated that he is considering requesting purchases.
“Spanish yields have fallen, suggesting increased market optimism about ECB and European Union policy action,” said Orlando Green, a fixed-interest strategist at Credit Agricole Corporate & Investment Bank in London.
Spain’s 10-year yield slid 46 basis points to 6.44 percent this week, reaching the lowest since July 5. The 5.85 percent securities maturing in January 2022 rallied 0.375, or 30.75 euros per 1,000-euro ($1,232) face amount, to 95.855. Spain’s two-year note yield dropped 43 basis points to 3.77 percent.
Yields on Spanish debt surged to euro-era records last month before ECB President Mario Draghi said on Aug. 2 that the central bank may buy sovereign bonds. Rajoy said the next day he would consider triggering the mechanism if it were in the “best interests of Spaniards,” and he reiterated those comments on Aug. 14.
Spain plans to sell 12- and 18-month debt on Aug. 21. France and the Netherlands will auction bills a day earlier, while Germany is set to offer two-year notes on Aug. 22.
The rate on German 10-year bonds climbed 11 basis points this week to 1.50 percent, the biggest advance since the five-days through July 27. Germany is “in line” with the ECB’s approach to defending the euro, Merkel said at a news conference in Ottawa on Aug. 16.
Spanish debt handed investors a loss of 3.3 percent this year through Aug. 16, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. That’s compared to a 2.8 percent return on German government bonds.