Spanish, Italian Bonds Advance on ECB Rate Outlook, Cyprus Deal
Spanish bonds rose, with 10-year securities gaining for a third day, on bets the European Central Bank will signal tomorrow it intends to keep interest rates at a record low, underpinning demand for higher-yielding assets.
Italian bonds also gained as the International Monetary Fund said it had agreed to contribute about 1 billion euros ($1.3 billion) as part of a rescue program for Cyprus. Spain’s two-year yields fell to the lowest in three weeks before the country sells debt maturing from 2016 to 2021 tomorrow. German two-year yields were below zero for a sixth day. Portuguese bonds advanced as Prime Minister Pedro Passos Coelho said the country’s bailout program will end next year.
“Everybody is looking for something that is yielding more” than German notes, said Piet Lammens, head of research at KBC Bank NV in Brussels. “A number of the underlying problems have at least been partially resolved. All this gives the market more resilience.”
Spain’s 10-year yield dropped three basis points, or 0.03 percentage point, to 4.91 percent at 5 p.m. London time after declining 14 basis points during the previous two days. The 5.4 percent bond due in January 2023 rose 0.235, or 2.35 euros per 1,000-euro face amount, to 103.715.
The two-year yield fell five basis points to 2.20 percent after reaching 2.15 percent, the lowest since March 11.
The ECB’s Governing Council will keep its main refinancing rate at a record low of 0.75 percent tomorrow, according to 54 of 56 economists surveyed by Bloomberg. The other two predict a cut to 0.5 percent. President Mario Draghi pledged in July to do “whatever it takes” to defend the single currency.
IMF Managing Director Christine Lagarde announced the staff-level agreement with Cyprus today on the 10 billion-euro program agreed on March 25. The deal calls for the nation to restructure its two largest banks, reduce budget deficits and adjust its wage and pension systems.
“We believe that it provides a durable and fully financed solution to the underlying problems facing Cyprus,” Lagarde said in a statement.
The Cyprus Central Bank will issue a decree extending capital controls aimed at preventing a flight of funds out of the country by seven days, said Yiangos Dimitriou, a central bank official.
Italy’s 10-year yield declined three basis points to 4.59 percent after dropping 14 basis points yesterday.
German bunds were supported on speculation some investors preferred to seek safety before the ECB meeting.
“We see bund yields staying pretty low before tomorrow’s ECB rate decision,” said Ralf Umlauf, an analyst at Landesbank Hessen-Thueringen in Frankfurt. “The market is waiting to see what happens and no one wants to be short.” A short position is a bet an asset will decline.
German 10-year yields fell two basis points to 1.29 percent and two-year rates were little changed at minus 0.001 percent.
Germany allotted 3.29 billion euros of five-year notes today at an average yield of 0.33 percent, down from 0.45 percent at the previous auction on March 6.
Portugal’s bonds gained as Coelho said in parliament that the country’s bailout program will end in May 2014. The nation’s 10-year yield fell 10 basis points to 6.33 percent, while two- year yields dropped 14 basis points to 2.93 percent.
Volatility on French bonds was the highest in euro-area markets today followed by those of the Netherlands and Finland, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
German bunds returned 0.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds gained 3.6 percent and Italy’s rose 0.6 percent.
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