Spanish, Italian Bonds Gain as ECB Signals Prolonged Low Rates

Spanish and Italian bonds advanced for a second week after the European Central Bank signaled it will keep interest rates low for longer, boosting demand for higher-yielding euro-area assets.

German two-year notes rose as ECB President Mario Draghi said on July 4 that the central bank planned to keep its interest rates low for an “extended period.” European bonds pared weekly gains after a report showed employment in the U.S. increased more than forecast, stoking speculation the Federal Reserve will scale back stimulus. Portuguese debt slid for a seventh week on concern the resignation of two ministers will derail the attempts to plug budget deficits.

“What Draghi pledged this week will provide support for most bonds in the region, at least in the near term,” said Richard McGuire, a fixed-income strategist at Rabobank International in London. Any positive “impact may be offset by any strong data out of the U.S. that strengthened the case for the Federal Reserve to start tapering bond purchases.”

Spain’s 10-year yields dropped 11 basis points, or 0.11 percentage point, this week to to 4.66 percent at 4:50 p.m. London time yesterday. The 4.4 percent bond maturing in October 2023 climbed 0.885, or 8.85 euros per 1,000-euro ($1,283) face amount, to 97.96. The rate on similar-maturity Italian securities decreased 12 basis points to 4.42 percent.

Euribor futures contracts climbed as investors added to bets on lower inter-bank borrowing costs. The implied yield on the contract expiring in June 2014 fell three basis points to 0.38 percent.

Forward Guidance

A report yesterday showed the U.S. economy added 195,000 jobs in June, compared with a median forecast of 165,000 in a Bloomberg News survey.

“The risks for the euro area continue to be on the downside,” Draghi said on July 4 after policy makers kept the ECB’s key benchmark rate at a record-low 0.50 percent. “Our monetary policy stance will remain accommodative for as long as necessary.”

In contrast, Federal Reserve Chairman Ben S. Bernanke said on June 19 U.S. policy makers may start to slow the pace of bond buying this year and end it in mid-2014 if the economy meets projections.

German Bunds

Germany’s two-year note yield slid eight basis points to 0.11 percent after reaching 0.08 percent on July 4, the lowest since June 6. The rate on the 10-year bund was little changed at 1.72 percent.

Portugal’s 10-year bonds dropped with the 10-year yield rising 68 basis points to 7.13 percent. It climbed to 8.11 percent on July 3, the highest since Nov. 21.

Italian bonds may be supported before a report next week that economists forecast will show industrial production in the euro region’s third-largest economy expanded in May after it fell for three consecutive months. Industrial output rose 0.3 percent after contracting 0.3 percent in April, according to the median estimate of analysts in a Bloomberg survey.

Spanish bonds returned 5.8 percent this year through July 4, according to the Bloomberg World Bond Indexes. German bonds declined 1.2 percent and Portuguese securities lost 1.1 percent.

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