Spain’s government bonds surged, pushing 10-year yields down the most in four weeks, before Prime Minister Mariano Rajoy meets his French and Italian counterparts amid speculation the nation will need to seek a bailout.
Spanish 10-year securities extended a weekly gain after European Central Bank officials yesterday reiterated they are ready to start buying the bonds of troubled countries as soon as the necessary conditions are fulfilled. Portuguese 10-year bonds rose for a fifth day, the longest streak of gains in six weeks, after the nation completed a debt swap two days ago. German bunds declined as investors sought higher-yielding assets.
“The biggest driver for Spanish bonds right now is will they or won’t they ask for aid,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “If we see Spain asking for help, then we will see a more dramatic move upward in the bonds because the uncertainty would be removed.”
Spain’s 10-year yield dropped 21 basis points, or 0.21 percentage point, to 5.69 percent at 4:28 p.m. London time, after falling 22 basis points, the most since Sept. 7. The 5.85 percent bond due in January 2022 rose 1.51, or 15.1 euros per 1,000-euro ($1,305) face amount, to 101.105. The yield has declined 25 basis points this week.
The 10-year yield may fall toward 5 percent should the nation ask for aid, Credit Agricole’s Green said.
While ECB President Mario Draghi said yesterday the central bank is ready to start buying bonds of sovereigns that ask for aid, Rajoy on Oct. 2 denied reports a rescue request would come this week. Economy Minister Luis de Guindos said yesterday no bailout was needed.
The Frankfurt-based ECB will probably buy “large volumes” of sovereign bonds for one-to-two months after the start of the bond-buying program, then suspend purchases for an assessment period, Reuters reported today, citing unnamed senior central bank officials. The ECB declined to comment on the report, according to Reuters.
Rajoy will hold discussions with Italian Prime Minister Mario Monti and French President Francois Hollande in a trilateral meeting at 6 p.m. in Valletta, Malta.
Germany’s 10-year yield climbed eight basis points to 1.52 percent, after reaching 1.53 percent, the highest level since Sept. 26.
Portugal’s 10-year yield declined 41 basis points to 8.26 percent, extending its weekly drop to 74 basis points, the most since the five-day period ended Sept. 7. The two-year yield slipped below 4 percent for the first time since Jan. 24, 2011. The rate fell as much as 52 basis points to 3.91 percent.
The nation’s debt agency, IGCP, exchanged securities maturing next year for notes due in 2015, reducing its 2013 repayment burden as it tries to regain access to long-term capital markets.
IGCP Chairman Joao Moreira Rato said in an interview published yesterday that the country is looking for an opportunity to sell securities directly to investors, known as private placements, after the debt swap.
Investors should buy long-dated Portuguese bonds as the debt exchange and the road to regain market access reduced concern about “subordination” risk, or the risk that public-sector creditors would rank ahead of private investors in the event of default, Paolo Batori and Robert Tancsa, London-based strategists at Morgan Stanley, wrote in a research note today.
Volatility on Portuguese bonds was the fourth highest in euro-region markets today after Ireland, Germany and Finland, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit default swaps.
German bonds have returned 3.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spain’s securities gained 0.9 percent, Italy’s rose 15 percent, while Portuguese securities earned 46 percent.