Italian and Spanish government bonds extended a rally from Tuesday amid speculation Greece will accept a bailout deal in time to secure its place in the euro.
German bunds, the region’s benchmark sovereign securities, fell for the first time in four days after European leaders set a Sunday deadline for Greece to accept a rescue or leave the currency union. The most-indebted euro-zone nation has until Friday to present its proposals. The gains in lower-rated debt also suggests that, if Greece is forced out, investors are confident the European Central Bank will be able to mitigate the fallout to the rest of the region.
“It would appear euro-bond markets are putting an optimistic spin on the ultimatum,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. Still, “it can all change in next to no time,” he said.
Italian 10-year bond yields dropped five basis points, or 0.05 percentage point, to 2.22 percent as of 4:12 p.m. London time, extending a 12 basis-point decline on Tuesday to reach 2.18 percent, the lowest level since June 26. The 1.5 percent security due in June 2025 rose 0.415, or 4.15 euros per 1,000-euro ($1,107) to 93.725.
The yield premium, or spread, that Italy’s bonds offer over equivalent-maturity German debt narrowed by 10 basis points, the most in more than two weeks, to 153 basis points.
German 10-year bund yields rose four basis points to 0.68 percent, after sliding 20 basis points in the previous three days. Spanish 10-year bond yields fell four basis points to 2.22 percent, while Portugal’s tumbled 13 to 3.01 percent.
Optimism a deal can be reached on Greece will be tested in the next few days, though.
ECB Executive Board member Christian Noyer said “we are starting to be very worried” about Greece’s fate. German Chancellor Angela Merkel said she’s “not especially optimistic” a deal can be reached by the deadline.
Greek two-year securities dropped for a fourth day. The price on the nation’s two-year notes fell to the lowest on a closing basis since they were sold via banks last July, with the yield climbing to 58.53 percent. Ten-year yields rose 50 basis points to 19.31 percent.
“The market may be pricing in the heightened risk of a Greek exit, but by the same token also factoring in the increased likelihood of ECB support,” said Richard McGuire, head of European rates strategy at Rabobank International in London. “Hence it’s proving positive for peripherals. Hopes of the ECB underpinning these markets is driving cash yields lower.”