Spanish and Italian notes advanced after European Central Bank President Mario Draghi was reported saying he would be comfortable buying three-year debt to lower borrowing costs for nations in financial distress.
Spain’s two-year yields declined to a five-month low while Italian rates fell for an eighth day on speculation a bond purchase plan will be announced at an ECB policy meeting this week. Longer-maturity bonds underperformed, with the extra yield investors demand to hold Spain’s 10-year securities instead of two-year notes reaching a record. Portuguese two-year yields fell by the most in four weeks, reaching the lowest level since March 2011. Austria sold five- and seven-year notes.
“We can expect the short end to perform pretty well, the comment that the ECB can go up to three years was positive news,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “There’s still a lot of uncertainty about the whole underlying structure of the project and that’s going to make it difficult for yields in the longer end to come down significantly.”
Yields on Spanish two-year notes dropped 43 basis points, or 0.43 percentage point, to 3.08 percent at 5 p.m. London time, the lowest since April 9. The declines widened the difference in yield between two-year securities and 10-year bonds to as much as 356 basis points, the most since Bloomberg began compiling the data in 1993. The five-year average is 171 basis points.
Italy’s two-year note yields fell 26 basis points to 2.37 percent, with the spread over 10-year rates reaching 338 basis points, the most on record.
Volatility on Portuguese government debt was the highest among developed markets, followed by Spain and Italy, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit default swaps.
Portugal’s two-year note yields declined as much as 84 basis points to 4.67 percent. That’s the biggest drop since Aug. 6, and the lowest rate since March 9, 2011, according to data compiled by Bloomberg.
Draghi may unveil the central bank’s bond-purchase strategy at a policy meeting on Sept. 6. He told lawmakers in a closed-door meeting yesterday that purchasing short-dated bonds doesn’t constitute state financing, according to Jean-Paul Gauzes, a member of the European Parliament.
“He thinks it’s not a violation of the treaty and you can do it under the current legal framework,” Gauzes said. “He said for example three years is OK, 15 years, no.” Gauzes released a statement later saying that Draghi hadn’t set out any future ECB operations on bond markets.
Spanish and Italian notes have rallied since Draghi said on July 26 that he would do “whatever it takes” to preserve the monetary union. Spain’s two-year yields dropped over the past month amid speculation the Frankfurt-based central bank will outline measures to stem market turmoil. The two-year rate reached a euro-era high of 7.15 percent on July 25.
The euro area’s 17 national central bank governors will be sent a list of options for the bond-buying program today, three central bank officials said on Aug. 31, on condition of anonymity because the plans aren’t public.
“It may well be that we don’t get all the details on Thursday, which will cause some disappointment for markets,” Craig Veysey, head of fixed income at Principal Investment Management Ltd. in London, part of Sanlam Group, which oversees $72 billion, said in an interview on Bloomberg Television’s Countdown with Linzie Janis. “There’s still considerable risk with regard to longer-dated investments in the likes of Italy and Spain.”
German 10-year bond yields were little changed at 1.39 percent, after reaching 1.43 percent, the most since Aug. 23.
Yields on Greek bonds due in February 2023 dropped as much as 124 basis points to 21.69 percent, the least since May 7. The nation sold 1.1375 billion euro of six-month bills today.
Austria issued 660 million euros of the June 2019 notes at an average yield of 1.344 percent, the Federal Financing Agency said on its website. It also sold 550 million euros of debt maturing in September 2017, at a record-low auction yield of 0.829 percent.
The Netherlands plans to sell dollar-denominated bonds maturing in September 2015 tomorrow, the Dutch State Treasury Agency said in a statement on its website. The nation plans to auction at least $2 billion of the securities, which will have a coupon of 0.25 percent, the agency said.
German government bonds returned 3.8 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italy’s rose 11 percent and Spain’s fell 3.7 percent.