Spanish Bonds Climb Amid Bailout Speculation as Irish Debt Gains
Spain’s bonds led gains among the government securities of Europe’s most-indebted nations amid speculation the country is poised to ask for a sovereign bailout that will trigger European Central Bank purchases of its debt.
The advance pushed 10-year Spanish yields to the lowest levels in almost a month. The rate on Italy’s two-year notes fell the most in more than a week after German Finance Minister Wolfgang Schaeuble said Europe has made “significant progress” in overcoming a crisis of confidence in the euro. Ireland’s nine-year yields fell to the least since June 2010.
“There has been a market rumor Spain would ask for a bailout this weekend,” said Richard McGuire, a senior fixed- income strategist at Rabobank International in London. “It could be that is helping the periphery today but I don’t ascribe any weight to it. We are caught in a paradox, the market has been buoyed by expectations of a bailout but Spain is likely to resist for as long as possible.”
Spanish 10-year yields declined 14 basis points, or 0.14 percentage point, to 5.62 percent at 4:07 p.m. London time, six basis points lower in the week. The yield earlier reached 5.61 percent, the least since Sept. 14. The 5.85 percent security maturing in January 2022 rose 0.995, or 9.95 euros per 1,000- euro ($1,296) face amount, to 101.58. Two-year note yields dropped 14 basis points to 3.08 percent.
Spain wants there to be consensus among European governments on any bailout request before deciding whether to ask for help, Deputy Prime Minister Soraya Saenz de Santamaria said yesterday.
Standard & Poor’s cut the nation’s sovereign-debt rating to one level above non-investment grade this week and Moody’s Investors Service is studying a possible downgrade from its current Baa3 level, its lowest investment-grade rank.
“We fear that Moody’s cut of Spain’s rating will come before the country’s official request for help,” strategists at Societe Generale SA led by Paris-based Vincent Chaigneau, the global head of interest-rate strategy, wrote in a note to investors. “This calm is not going to last.”
Italian two-year note yields fell as much as 14 basis points to 2.12 percent, the biggest decline since Oct. 2. The rate was heading for a weekly drop of six basis points.
“This time there is a much more positive underlying sentiment” among global finance chiefs toward Europe, Schaeuble said today at a briefing with Bundesbank President Jens Weidmann in Tokyo, which is hosting the annual International Monetary Fund and World Bank meetings. European participants at the gathering have agreed that “we explain very precisely and openly what we’re doing, what we’ve achieved and what progress we’ve made.”
Spain’s 10-year rate has declined more than two percentage points since reaching a euro-era high of 7.75 percent on July 25, the day before ECB President Mario Draghi pledged to do “whatever it takes” to safeguard Europe’s monetary union. It is still above this year’s low of 4.83 percent.
“People are buying on the dips for Italy and Spain,” said Elaine Lin, a strategist at Morgan Stanley in London. “The idea that the ECB might come in and buy the bonds is a credible backstop and stops people aggressively shorting these bonds.”
A short position is a bet an asset will fall in price.
Volatility on Ireland’s government bonds was the highest in euro-region markets today, followed by Finland and Belgium, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit default swaps.
The yield on Ireland’s bond due in October 2020 fell 17 basis points to 4.76 percent after touching 4.74 percent, the lowest level since June 2010.
German government bonds returned 3 percent this year through yesterday, according to indexes compiled by Bloomberg outperforming Spanish bonds, which gained 1.8 percent. Irish bonds have advanced 26 percent, the indexes show.