Italy, Spain Bonds Drop on ECB Concern, Catalonia Funding Needs

Italian and Spanish 10-year government bonds fell amid concern policy makers at the European Central Bank will fail to contain the region’s debt crisis as they prepare to meet next week.

Spain’s 10-year yield approached the highest in a week after Catalonia said it planned to request 5 billion euros ($6.28 billion) from a regional financing facility. Italy’s bonds dropped as the nation prepared to sell as much as 7.5 billion euros of securities maturing in five and 10 years this week. Shorter-maturity Spanish and Italian two-year notes advanced after borrowing costs fell at auctions.

“There’s a nervousness in the market before the ECB meeting and what policy makers will be able to do,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “There is a lot of uncertainty in the market and Italy and Spanish bonds are the most sensitive to this. The 10-year Italian bond is losing ground before the supply. There will probably be a selloff until that auction is out of the way.”

The Spanish 10-year yield rose nine basis points to 6.47 percent at 4:28 p.m. London time after climbing to 6.49 percent on Aug. 24, the highest level since Aug. 20. The 5.85 percent bond due in January 2022 fell 0.62, or 6.20 euros per 1,000-euro face amount, to 95.64.

The Italian 10-year yield climbed 11 basis points, or 0.11 percentage point, to 5.82 percent.

ECB Purchases

Spanish and Italian 10-year yields dropped to three-month lows last week on speculation the ECB and the region’s 17 member nations will agree on a plan to use short-maturity sovereign debt purchases to curb governments’ borrowing costs and win them time to implement fiscal changes. ECB President Mario Draghi said on Aug. 2 any central-bank bond purchases would focus “on the short end of the yield curve.”

Italy’s two-year yield slid 10 basis points today to 3.03 percent, and similar-maturity Spanish yields fell nine basis points to 3.66 percent.

Italy sold 3 billion euros of two-year zero-coupon notes at a yield of 3.064 percent, down from 4.86 percent at the previous auction on July 26. Demand rose to 1.95 times the amount allotted, from 1.78 times. The nation also auctioned inflation-linked bonds due in 2016 and 2019.

Spain Sale

The Spanish Treasury sold 3.6 billion euros of bills, surpassing its 3.5 billion euros target. The yield for three-month securities fell to 0.946 percent from 2.434 percent at the last sale on July 24. The rate on the six-month bills dropped to 2.026 percent from 3.691 percent in July.

The auction results “illustrate that post Mario Draghi’s comments regarding the ECB’s intention to concentrate purchases on the short end, that demand for short-dated paper has been relatively strong,” said Brian Barry, an analyst at Investec Bank Plc in London. “We’re seeing longer-dated paper of both Spain and Italy underperform.”

Italy is scheduled to sell 9 billion euros of 181-day bills tomorrow, and debt due in 2017 and 2022 on Aug. 30.

Catalonia will seek almost a third of the 18 billion-euro fund created in July by the government of Prime Minister Mariano Rajoy to help shore up finances in Spain’s 17 autonomous regions. Valencia was the first to tap the fund with an unspecified request on July 20.

German Bunds

German bonds advanced as investors sought the region’s safest assets.

The 10-year bund yield fell two basis points to 1.34 percent. It declined to 1.32 percent on Aug. 24, the lowest level since Aug. 3.

The market is “going to continue to concentrate on how the ECB is going to act,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “It’s got to the stage where I wouldn’t want to be short bunds going into the meeting.” A short position is a bet an asset will decline.

Finland sold 4 billion euros of 10-year bonds priced to yield three basis points more than the mid-swap rate. Finnish securities maturing in April 2021 yielded 1.51 percent.

Volatility in Italian government debt was the highest in the euro area today, followed by Spain and Germany, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit default swaps.

German bonds have returned 3.8 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities fell 2.3 percent, while Italy’s gained 11 percent.

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