Spanish bonds rose, pushing 10-year yields to the lowest level in eight weeks, after European Central Bank President Mario Draghi said policy makers agreed to an unlimited debt-purchase program to cap borrowing costs.
German 10-year bonds fell after Draghi said the plan provided a fully-effective backstop for the euro area, undermining demand for the safest assets. The Frankfurt-based central bank left its main refinancing rate at a record-low 0.75 percent. Italian 10-year yields fell to the least since April. Portugal’s notes rose, with two-year yields falling to the lowest since March 2011.
“Draghi hasn’t disappointed,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “The market had a list of expectations heading in to the meeting and so positively it seems that Draghi has addressed all the concerns. Bunds sold off into the meeting and Spanish bonds are higher.”
Spain’s 10-year yield fell 39 basis points, or 0.39 percentage point, to 6.02 percent at 4:34 p.m. London time, the lowest since June 11. The 5.85 percent security maturing in January 2022 rose 2.655, or 26.55 euros per 1,000-euro ($1,263) face amount to 98.755. Similar-maturity Italian bonds fell 22 basis points to 5.30 percent.
The plan will “assist the monetary policy transmission mechanism in all euro area countries,” Draghi told reporters in Frankfurt today. “We will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.”
For its plan to succeed, the central bank may have to indicate it is willing to buy the 180 billion euros of Spanish and Italian notes maturing between one and three years held by non-domestic investors, said Mohit Kumar head of European fixed-income strategy at Deutsche Bank AG in London.
The two countries have 846 billion euros of securities maturing between 2013 and 2015, about 37 percent of their outstanding debt, according to data compiled by Bloomberg.
Germany’s 10-year bund yield climbed eight basis points to 1.56 percent, after reaching 1.57 percent, the highest level since Aug. 21. Two-year yields added five basis points to 0.04 percent, after rising to 0.042 percent, the most since July 5.
The euro advanced to a two-month high against the dollar even as the central bank cut its growth forecast for 2012, saying euro-area gross domestic product will drop 0.4 percent this year instead of a 0.1 percent contraction projected three months ago.
The ECB will target government bonds with maturities of one to three years, including longer-dated debt that has a residual maturity of that length, Draghi said. Purchases will be fully sterilized, meaning that the overall impact on the money supply will be neutral, and the ECB will not have seniority, he said.
“For risk sentiment, it was what the market was waiting for and that’s why we continue to have higher bund yields,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “This is giving support to the countries which would mostly benefit, especially at the short end, and therefore those spreads are expected to tighten.”
Volatility on Spanish bonds was the highest in euro-region markets today, followed by Portugal, 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 today, the central bank said. The nation auctioned 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 sale. It also sold debt maturing in 2015 and 2016.
Portugal’s two-year notes advanced on speculation that the ECB may buy the securities as part of its plan. The rate fell 23 basis points to 4.61 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.”
Spanish bonds have returned 2.4 percent this month through yesterday, cutting their decline this year to 1.6 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities have risen 2 percent in September, while German bonds have lost 0.7 percent.