German Bonds Drop on Greek Loan, ELA as Spain’s Securities Climb

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German government bonds fell for the first time in four days as prospects for financial aid to Greece curbed demand for haven assets.

Spanish securities advanced after European Central Bank President Mario Draghi said officials had added Emergency Liquidity Assistance for Greek banks. An official said earlier that an agreement in principle had been made for euro-area finance ministers to grant Greece 7 billion euros ($7.6 billion) of short-term funding.

“The extended ELA is positive for sentiment,” said Mohit Kumar, head of rates strategy at Credit Agricole SA’s corporate and investment-banking unit in London. Draghi’s “tone suggests that ECB decisions were always based on consideration that Greece remains part of the euro. That is good for peripheral bonds.”

German 10-year bund yields rose two basis points, or 0.02 percentage point, to 0.84 percent at 4:12 p.m. London time. The 1 percent security due in August 2025 fell 0.145, or 1.45 euros per 1,000-euro face amount, to 101.51.

Spain’s 10-year bond yield dropped below 2 percent for the first time since June 2, falling three basis points to 1.99 percent. The additional yield, or spread, investors demand to own them instead of equivalent-maturity German bunds narrowed to 114 basis points, the lowest on a closing-price basis since May 21.

ECB Backstop

While the region’s bond markets have swung back and forth on shifts in sentiment toward Greece, moves have been damped by speculation the ECB would provide a backstop if needed. After policy makers kept interest rates unchanged on Thursday, Draghi stressed at a press conference in Frankfurt that the ECB would use all instruments it had if they were needed to support price stability.

While policy makers “substantially accommodated” the Bank of Greece’s request for funding, according to Draghi, the bond-market reaction was muted amid speculation the Greek financial system still faces headwinds.

The ECB raised its ELA to Greek banks by 900 million euros on the assumption that Greece will remain part of the currency union. The new bridge loan restored the conditions needed to unfreeze the support from the central bank, Draghi said.

“The ECB has only increased the ELA by a very small amount,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “Effectively the pressure is still there for the Greek government to get a longer-term funding program. It would have been more of a market mover if they had increased it by 3-5 billion euros.”

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