Spanish bonds gained, pushing 10-year yields to the lowest in seven weeks, on optimism the European Central Bank is moving toward a crisis-fighting plan that will limit borrowing costs for indebted nations.
German bunds fell for the first time in three days after Spiegel magazine reported yesterday the ECB would be prepared to buy government debt to enforce a cap on yields, without saying where it got the information. Spanish and Italian bonds pared gains after the German Bundesbank stepped up its opposition to the ECB’s plan to embark on government debt purchases.
“The markets are looking at any kind of news like the Spiegel report to push peripheral spreads tighter,” said Padhraic Garvey, head of developed-markets debt at ING Bank NV in Amsterdam, referring to the difference between benchmark German yields and those of nations such as Spain and Italy. “It is highly unlikely they will put a level out there for the market to target.”
Spain’s 10-year yield fell 15 basis points, or 0.15 percentage point, to 6.29 percent at 4:17 p.m. London time, after dropping to 6.16 percent, the lowest since July 2. The 5.85 percent bond due in January 2022 rose 1.035, or 10.35 euros per 1,000-euro ($1,233) face amount, to 96.89.
The Spanish two-year yield declined 18 basis points to 3.59 percent after slipping to 3.36 percent, the least since May 8.
The two-year rate has fallen from a euro-era high of 7.15 percent set on July 25 amid speculation policy makers will increase efforts to rein in borrowing costs. ECB President Mario Draghi said Aug. 2 the central bank may buy debt together with the region’s bailout funds to address rates that are elevated on “fears of the reversibility of the euro.”
Spanish Economy Minister Luis de Guindos urged the ECB to deploy unlimited bond buying in the secondary market, according to an interview with Spanish news agency Efe on Aug. 18. The ECB said today the Governing Council hasn’t discussed any plan to target the bond yields of euro region members.
The extra yield investors demand to hold Spanish 10-year bonds instead of their German equivalents narrowed 16 basis points to 478 basis points. The spread expanded to as much as 650 basis points on July 25.
Germany’s 10-year bund yield was little changed at 1.50 percent after rising as high as 1.58 percent. The two-year yield climbed two basis points to minus 0.025 percent. A reading below zero means investors who hold the debt to maturity will receive less than they paid to buy it.
Luxembourg’s Prime Minister Jean-Claude Juncker, who also heads the group of euro-area finance ministers, will discuss a request by Greece’s Prime Minister Antonis Samaras for a two-year extension to the indebted nation’s fiscal adjustment program when he visits Athens on Aug. 22. Samaras will travel to Berlin and Paris on Aug. 24 and 25 after French President Francois Hollande and German Chancellor Angela Merkel meet in Berlin on Aug. 23.
The idea of a yield or spread cap “is a very powerful one that is likely to dominate markets in an otherwise data-deprived session,” Peter Schaffrik, head of European interest-rate strategy at Royal Bank of Canada in London, wrote today in a note to clients. A yield limit “reduces the angst of nearly unlimited losses that drove investors out of peripheral markets and should create a powerful incentive to either remain invested or even return,” he said.
Spanish and Italian bonds trimmed their advance after the Bundesbank said increased government bond purchases would “entail significant stability risks.”
“Government bond purchases by the Eurosystem are to be seen critically,” the central bank said in its monthly report. The new program “could be unlimited” and decisions about potentially far greater sharing of solvency risks should be taken by governments, not by central banks, it said.
Italy’s 10-year bond yield dropped one basis point to 5.78 percent after declining to 5.70 percent, the lowest level since July 4.
Spain’s government bonds handed investors a loss of 2.7 percent this year through Aug. 17, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Germany’s debt gained 3 percent, and Italy’s securities climbed 10 percent.