German Bunds Decline for 5th Day Before ECB; Spanish Notes Fall

German 10-year bunds fell for a fifth day amid speculation the European Central Bank will unveil details of a bond-purchase plan to cap borrowing costs for so-called peripheral euro-area nations.

Spain’s two-year notes declined as demand fell at an auction of short-dated government debt. German two-year yields rose to a two-month high amid speculation steps by the central bank today will boost demand for higher-yielding assets. The yield difference between German and Italian 10-year securities narrowed to the least in almost four months. The ECB will cut its refinancing rate to 0.5 percent from 0.75 percent, according to 30 out of 58 economists in a Bloomberg News survey.

“The market is expecting something that could be positive for risk appetite and would naturally be in favor of spread narrowing within the euro zone,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “In general we can imagine that bund yields go higher in the medium term irrespective” of what the ECB does today, he said.

The 10-year bund yield rose three basis points, or 0.03 percentage point, to 1.51 percent at 11:34 a.m. London time, after reaching 1.54 percent, the highest level since Aug. 22. The 1.5 percent security due in September 2022 declined 0.255, or 2.55 euros per 1,000-euro ($1,262) face amount to 99.94. Two-year yields added three basis points to 0.01 percent, after climbing to as high as 0.035 percent, the most since July 5.

The central bank will announce its decision at 1:45 p.m. in Frankfurt. ECB President Mario Draghi will hold a press conference 45 minutes later.

ECB Proposal

Draghi will provide details of a bond-buying proposal that will have unlimited purchases and will be sterilized to ease concerns about printing money, two central bank officials briefed on the plan said yesterday. The ECB will refrain from setting a public cap on yields, according to the people, and a third official, who spoke on condition of anonymity.

German bunds rallied after the previous ECB meeting on Aug. 2, with 10-year yields dropping 14 basis points and two-year rates falling to a record minus 0.097 percent, amid concern Draghi didn’t announce sufficient measures to contain the region’s debt crisis.

“Expectations for today’s meeting are correspondingly high and scope for disappointment has developed, in our view, as the markets have priced in a clear decision,” Viola Julien, an analyst at Helaba Landesbank Hessen-Thueringen in Frankfurt, wrote in e-mailed comments. “Bond purchases by the ECB are not without risk or controversy.”

Spanish Auction

The extra yield that investors demand to hold Italian 10-year bonds instead of similar-maturity German bunds shrank three basis points to 4 percentage points after narrowing to 3.87 percentage points, the least since May 8.

Volatility on Spanish bonds was the highest in euro-region markets today, followed by France and Italy, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit default swaps.

Spain sold 3.5 billion euros of securities at an auction today, the Bank of Spain said. The nation sold notes maturing in 2014 at an average yield of 2.798 percent, compared with 4.706 percent when they were sold in June. Investors bid for 2.01 times the amount allotted, down from 3.97 times at the June auction. It also sold debt maturing in 2015 and 2016.

Ireland, Portugal

Spanish two-year note yields increased 20 basis points to 3.30 percent, while those on Italian securities with a similar maturity rose 18 basis points to 2.63 percent.

Portugal’s two-year notes advanced on speculation that the ECB may buy the securities as part of its plan. The rate fell five basis points to 4.79 percent.

“It will be interesting to see whether the plan will be immediately applied to Ireland and Portugal,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “For these countries, Draghi may confirm that they can benefit from ECB buying and that would be something that the market would embrace.”

French 10-year bonds snapped an eight-day decline as the nation sold 3 billion euros of bonds maturing in April 2022 at an average yield of 2.21 percent, the lowest at any auction since at least 1999. Ten-year yields slipped two basis points to 2.22 percent.

German government bonds returned 3.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds have fallen 1.6 percent and Italian debt gained 13 percent, the indexes show.

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