German bonds led gains in euro-area government securities as European Central Bank President Mario Draghi said inflation risks in the region are contained, allowing monetary policy “to remain accommodative.”
Germany’s two- and five-year yields dropped to the lowest level in two weeks as Draghi said the risk to economic growth in the 17-nation bloc remains to the “downside.” ECB policy makers kept the benchmark refinancing rate at a record-low 0.75 percent as predicted in a Bloomberg News survey. Spain’s bonds rose as the country sold 4.61 billion euros ($6.18 billion) of debt. Italian 10-year yields fell from an eight-week high.
“Draghi stressed in his prepared remarks that the ECB will closely monitor liquidity conditions and that an accommodative stance remains appropriate,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “This is the verbal intervention the market was looking for and is positive for German bonds.”
German five-year note yields fell six basis points, or 0.06 percentage point, to 0.63 percent at 4:38 p.m. London time after falling to 0.61 percent, the least since Jan. 25. The 0.5 percent security due in February 2018 rose 0.295, or 2.95 euros per 1,000-euro face amount, to 99.405.
Two-year rates fell four basis points to 0.18 percent, after slipping to 0.16 percent, the lowest since Jan. 24. The 10-year yield slipped three basis points to 1.60 percent and the rate on 30-year bunds was one basis point lower at 2.37 percent.
Inflation risks are contained, allowing policy “to remain accommodative,” and economic weakness will prevail only “in the early part” of this year, Draghi said. “Later in 2013, economic activity should gradually recover, supported by our accommodative policy stance,” he said.
The extra yield, or spread, that investors get for holding 10-year bunds instead of five-year notes increased to as much as 99 basis points, the most since Jan. 16. The widening gap reflects greater demand for securities with shorter maturities, which are more sensitive to the outlook for monetary policy. Longer-dated debt is more sensitive to inflation expectations.
Euribor futures also advanced after Draghi said the central bank will monitor money-market conditions as banks repay loans taken under its so-called longer-term refinancing operations.
The implied yield on the contract expiring in December dropped five basis points to 0.44 percent, after falling to 0.42 percent, the lowest since Jan. 25.
Spanish 10-year bond yields declined three basis points to 5.41 percent, after rising to 5.52 percent, the most since Dec. 11. Yields on similar-maturity Italian debt were little changed at 4.57 percent, after climbing to 4.62 percent, the highest since Dec. 14.
Spain sold securities maturing in 2015, 2018 and 2029 today. It allotted 2.07 billion euros of five-year notes at an average yield of 4.12 percent, up from 3.77 percent at a previous auction of the securities on Jan. 17.
“It’s a bit of a mixed picture,” said Annalisa Piazza, a fixed-income analyst at Newedge Group in London. “The risks of wider spreads are still quite high” amid elections in Italy this month, she said.
While Spain issuing more than its 4.5 billion-euro maximum target may be a positive sign, it may also indicate “that they think in the next few weeks yields go even higher, so it’s better to conduct funding needs at current levels,” she said.
The extra yield, or spread, that investors demand for holding Italy’s 10-year securities instead of German bunds increased to 300 basis points, the most since Jan. 2. The gap has widened from 243 basis points on Jan. 25, the least since July 22, 2011.
French borrowing costs rose as the nation sold 7.98 billion euros of government debt.
The Paris-based treasury auctioned 3.02 billion euros of 10-year bonds at an average yield of 2.30 percent, compared with 2.07 percent at the previous sale on Jan. 3. It also sold 3.19 billion euros of 14-year securities and 1.77 billion euros of seven-year notes.
France’s 10-year yield fell four basis points to 2.25 percent.
German bonds handed investors a loss of 1.5 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt returned 0.7 percent, while French securities dropped 1.8 percent.