Spanish, Italian Bonds Lead Euro Debt Slide as Stimulus Weighed

  • France, Spain sell combined 12 billion euros of debt
  • Gyrations reflect `tug-of-war' between ECB policy makers: SEB

Spanish and Italian government bonds led declines across the euro region as investors questioned the level of additional stimulus they can expect from the European Central Bank.

Bonds reversed Wednesday’s rally as Spain joined France in auctioning a combined 12 billion euros ($13.4 billion) of debt. The declines come even after ECB President Mario Draghi told a conference in Frankfurt that policy makers stand ready to expand stimulus.

Yet investors burnt by a smaller-than-anticipated boost to his bond-buying plan in December are wary that conflict between Governing Council members may limit further expansion.

“It’s a tug-of-war between the bulls and bears,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “There is some degree of skepticism creeping back into the market about whether the ECB will be able to deliver what markets have been pricing. You can’t trust an extremely dovish rhetoric by Mr. Draghi to translate into a strong policy decision.”

The yield on Spain’s 10-year bond rose 10 basis points, or 0.10 percentage point, to 1.65 percent as of the 5 p.m. London close. The 2.15 percent security due in October 2025 fell 0.875, or 8.75 euros per 1,000-euro face amount, to 104.505. That’s the biggest jump in yield this year.

Debt Sales

Spain sold securities due in 2026 and 2037 and inflation-linked debt maturing in 2019, while France auctioned bonds including debt due in November 2025. France’s 10-year bond yields rose three basis points to 0.64 percent after the sale. Yields on similar-maturity Italian debt increased 10 basis points to 1.53 percent.

Draghi’s Jan. 21 statement that the central bank may reconsider its policy stance as soon as March sparked a rally that pushed German note yields to record lows this week.

It also helped send the average yield on euro-zone debt to the lowest since April. The average reached a record low in the days following the introduction of quantitative easing last March. The ECB’s policy toolbox is “not exhausted,’’ Executive Board member Yves Mersch said Thursday in Zurich.

The benchmark German 10-year bund yield climbed three basis points Thursday to 0.30 percent. It dropped below 0.3 percent earlier, the lowest in nine months and a level that represents a “strong resistance to further yield declines,” according to SEB’s Daheim.

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