Spanish 10-year bonds advanced for a third day as officials said the European Central Bank’s government bond-buying proposal involves unlimited purchases, boosting demand for the debt of so-called peripheral nations.
Germany’s 10-year bunds dropped after the nation received bids for less than its maximum target at an auction. Spanish two-year notes fell before the country sells as much as 3.5 billion euros ($4.4 billion) of securities due between 2014 and 2016 tomorrow. The Frankfurt-based ECB, led by President Mario Draghi, will refrain from setting a public cap on yields, according to three officials, who spoke on condition of anonymity.
“It’s positive news, and the bond market is reacting to that,” said Marchel Alexandrovich, a senior European economist at Jefferies International Ltd. in London. “There was some concern that Draghi won’t be able to provide any details on a bond-buying program at all, but this report suggested that there will be at least some guidelines. That’s better than nothing.”
Spanish 10-year yields dropped 15 basis points, or 0.15 percentage point, to 6.42 percent at 4:08 p.m. London time. The 5.85 percent security maturing in January 2022 rose 0.99, or 9.90 euros per 1,000-euro face amount, to 96.015.
The nation’s two-year yield advanced five basis points to 3.12 percent.
The ECB would refrain from setting a public cap on yields, according to the officials. The plan will only focus on government bonds rather than a broader range of assets and will target short-dated maturities of up to about three years, two of the people said.
The 14-day relative strength index for Spanish notes, which tracks momentum by comparing closing prices with daily trading ranges, was 68, after reaching 68.5 yesterday, the highest since March. The 70-level indicates an asset may be “overbought” and has risen too quickly.
Volatility on Italian government debt was the highest among developed markets, followed by Spain, according to measures of 10-year bonds, the spread between two- and 10- year securities, and credit default swaps.
Italian two-year rates climbed seven basis points to 2.44 percent, trimming eight days of declines.
Spain is scheduled to sell notes due in April 2014 tomorrow. It last sold the securities on June 21 at an average yield of 4.71 percent. The nation also plans to auction debt maturing in July 2015 and October 2016. France plans to sell bonds due in 2017, 2022 and 2027.
“There’s pressure at the front-end of the Spanish curve before the short-dated debt sales tomorrow,” said Richard McGuire. “They rallied so strongly on the ECB expectations.”
Germany got bids for 3.93 billion euros of the 10-year bonds it sold today, less than its 5 billion-euro maximum sales target, according to a Bundesbank statement. Germany sold the securities at an average yield of 1.42 percent, the same rate as the last sale on Aug. 8. That compares with a record low auction yield of 1.31 percent on July 11.
“The result of the auction is a reflection of how tough the market is ahead of the big event tomorrow,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London. “We don’t know what the ECB will say and no one wants to build a huge position ahead of that.”
The yield on Germany’s 10-year bund maturing in September 2022 sold today rose two basis points to 1.46 percent. The extra yield investors demand to hold U.S. Treasury 10-year notes instead of similar-maturity bunds narrowed to 11 basis points, the least since July 26. As recently as Aug. 24, Treasuries yielded 33 basis points more than bunds.
The ECB will cut its benchmark interest rate by 25 basis points to 0.50 percent tomorrow, according to the median forecast of 58 economists surveyed by Bloomberg. 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 have fallen from a euro-era high of 7.15 percent on July 25.
“I am looking for details tomorrow on which bonds the ECB might buy,” said Peter Schaffrik, head of European interest-rate strategy at Royal Bank of Canada in London. “The rally can go on. Spanish and Italian two-year yields can reach 2 percent.”
German government bonds returned 3.7 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds have fallen 2.2 percent and Italian debt has returned 12 percent, the indexes show.