Spanish, Italian Bonds Decline After Demand Drops at Debt Sales

Spanish, Italian Debt Falls After Auctions as German Bunds Climb
Spain sold 4 billion euros of bills at an auction in Madrid today meeting its maximum target, the Bank of Spain said. Photographer: Angel Navarrete/Bloomberg

Spanish and Italian government bonds fell as demand declined when the two nations sold debt today amid concern the region’s financial turmoil is worsening.

Spain’s securities dropped for the first time in three days as Deputy Prime Minister Soraya Saenz de Santamaria said the country needs to know how much the European Central Bank will spend on debt purchases before it decides whether to ask for a bailout. German two-year notes fell as ECB Governing Council member Ewald Nowotny said he doesn’t see a need to cut interest rates at the moment.

“Markets are likely to be looking for any indication of a softening in investor appetite, through lower demand or rising yields,” said Brian Barry, an analyst at Investec Bank Plc in London. Rising yields at Spain’s bill sale “could potentially be an indication of the growing sense of unease felt by investors over the protracted bailout saga.”

Spain’s two-year yield climbed 13 basis points, or 0.13 percentage point, to 3.16 percent at 4:19 p.m. London time. The 4.75 percent note due in July 2014 dropped 0.23, or 2.30 euros per 1,000-euro ($1,295) face amount, to 102.775. The 10-year yield increased seven basis points to 5.76 percent.

Spanish borrowing costs increased as the nation sold three-month bills at a yield of 1.203 percent, up from 0.946 percent at the previous auction on Aug. 28. Demand dropped to 3.29 times the amount allotted, from 3.35 times in August. The country also sold six-month debt at 2.213 percent, versus 2.026 percent.

‘Draghi Effect’

The increase in borrowing costs suggests “the ‘Draghi effect’ may be beginning to wane,” Richard McGuire, a fixed-income strategist at Rabobank International in London, wrote in a client note. “The longer Spain prevaricates on the bailout front, the more this effect is likely,” he said.

ECB President Mario Draghi announced a bond-purchase plan to Sept. 6 to cap borrowing costs in the euro area’s most indebted nations.

Italy attracted bids for 1.65 times the amount of two-year zero-coupon notes it sold today, down from a so-called bid-to-cover ratio of 1.95 at the previous auction on Aug. 28.

The yield on Italy’s two-year note climbed five basis points to 2.30 percent, and the 10-year rate increased five basis points to 5.10 percent.

German two-year notes dropped for a second day as Nowotny, who heads Austria’s central bank, said “I see no need for interest-rate changes.” He made the comments in a live internet chat with Die Presse, an Austrian daily newspaper.

ECB Benchmark

The ECB cut its main refinancing rate in July to a record 0.75 percent and economists forecast another reduction by year-end, according to a Bloomberg News survey.

The implied yield on Euribor interest-rate futures for December rose for a second day as traders pared bets that policy makers would cut borrowing costs. The yield climbed two basis points to 0.195 percent.

The German two-year note yield climbed three basis points to 0.07 percent.

The extra yield, or spread, that investors demand to hold 10-year French bonds instead of similar-maturity German bunds widened to as much as 75 basis points, the most since Sept. 11.

Greece’s financing gap will increase if it falls short of targets for its budget deficit and state asset sales, according to Alternate Finance Minister Christos Staikouras.

The ECB and other central banks in the euro area hold 28 billion euros of Greek bonds due by the end of 2016 that may need to be rolled over given the country’s financing constraints, Staikouras said in a written response to a lawmaker’s question e-mailed by the Finance Ministry.

The yield on Greek 10-year bonds fell as much as 13 basis points to 19.31 percent, the lowest since March 23, before being little changed at 19.43 percent.

Dutch Sale

The Netherlands sold 1.92 billion euros of bonds maturing in 2033 at an average yield on 2.497 percent, compared with 2.342 percent at the previous auction on June 12.

Volatility on Irish bonds was the highest in euro-area markets today, followed by the Netherlands, according to measures of 10-year or equivalent-maturity debt, the spread between two- and 10-year securities and credit-default swaps.

German bonds returned 2.6 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities added 2 percent, while Italy’s rose 15 percent.

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