German bonds rose, with 10-year yields falling from the highest in three months, as a European Central Bank official downplayed the effect on overnight interbank interest rates if banks repay loans to the ECB.
Spanish and Italian securities also rallied as Executive Board member Benoit Coeure told journalists the ECB doesn’t have a view on whether banks should start early repayments of the three-year funds borrowed under the so-called Longer-Term Refinancing Operations. European bond yields surged during the previous two days amid speculation demand for funds to repay the ECB would drive up the cost of money and leave less available for short-term loans.
“We saw some panic selling this morning but expectations that rates are going to go up have been tempered” by Coeure’s comments, said Owen Callan, an analyst at Danske Bank A/S in London. “Core bund yields are moving lower on the back of this story and Spain and Italy are following them.”
The yield on Germany’s 10-year bund fell five basis points, or 0.05 percentage point, to 1.56 percent at 4:38 p.m. in London after climbing to 1.64 percent, the highest since Oct. 18. The 1.5 percent security due in February 2023 rose 0.485, or 4.85 euros per 1,000-euro ($1,328) face amount, to 99.495. The securities have dropped three basis points this week.
Spanish 10-year yields declined five basis points to 5.08 percent, while those on similar-maturity Italian bonds fell four basis points to 4.16 percent.
The ECB flooded financial markets with more than 1 trillion euros in three-year loans starting in December 2011 as a credit crunch threatened Europe’s financial system. With signs of a recovery now underway, investors are testing the ECB’s attitude to loan repayments.
“We don’t have a normative or prescriptive view on whether banks should repay the LTRO” early, Coeure said at an event in Paris. “Will it have a big impact on the money market? I don’t expect it to have a big impact.”
Banks aren’t likely to make large repayments on their ECB loans, said Soeren Moerch, head of government-bond trading at Danske Bank A/S in Copenhagen.
“I don’t think banks will return more than 250 billion euros back over the coming months,” he said. “Peripheral banks still have huge benefits from ECB funding, compared to market funding. The market is still nervous about the LTRO repayment, but I think it may have overreacted.”
The implied yield on euro interbank offered rate futures expiring in December dropped two basis points to 0.44 percent, signaling traders were reducing bets on higher borrowing costs.
Portuguese 10-year bonds rose for a third week after Prime Minister Pedro Passos Coelho signaled the nation plans to return to the debt market as it doesn’t want a second rescue program.
The yield on 10-year the nation’s bonds dropped 16 basis points today to 6.13 percent, leaving it eight basis points lower this week.
Volatility on Greek bonds was the highest in euro-region markets today, followed by those of France and Germany, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit default swaps.
German bonds handed investors a loss of 1.5 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities returned 1.4 percent and Italy’s advanced 1.9 percent.