Spanish Note Yields Decline to Four-Year Low on ECB Speculation

Spain’s two-year note yield fell to the lowest in more than four years as speculation the European Central Bank will boost economic stimulus measures boosted demand for the euro area’s higher-yielding short-maturity debt.

Italy’s two-year rate dropped to the lowest in more than six months after Sueddeutsche Zeitung reported the ECB is considering a new Longer-Term Refinancing Operation tied to bank lending, without citing anyone. The ECB’s Governing Council will hold its next monthly interest-rate meeting on Dec. 5, when it will present new staff projections for growth and inflation. German consumer confidence will rise to a six-year high in December, a report by research company GfK AG showed.

“Inflation keeps surprising to the downside in terms of economist forecasts so there’s obviously a chance the ECB are going to have to do something,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “Another LTRO when the existing ones get below one year to maturity is quite likely. People still have enough faith that the ECB will do something to respond to think it’s safe to be dipping into these peripheral markets, especially in shorter maturities.”

Spain’s two-year note yield fell two basis points, or 0.02 percentage point, to 1.30 percent at 10:39 a.m. London time after touching 1.27 percent, the lowest since July 2009. The 3.75 percent security due in October 2015 rose 0.02, or 20 euro cents per 1,000-euro ($1,360) face amount, to 104.585.

The rate on Italy’s two-year debt dropped as much as four basis points to 1.09 percent, the least since May 3.

Goldman’s Forecast

The additional yield investors demand to hold Spanish and Italian two-year notes instead of their German equivalents will narrow in 2014, according to Goldman Sachs Group Inc.

“The spread between two-year German bonds and those in Italy and Spain is still over 100 basis points, and could easily fall by a half over the coming year,” strategists including Francesco Garzarelli in London wrote in an e-mailed note yesterday. “We do not think the market is assigning a sufficiently high probability to the possibility of negative deposit rates, or an extension of full-allotment term funding” by the ECB, they wrote.

The yield spread between two-year Spanish notes instead of similar-maturity German securities narrowed to 118 basis points today. Italy’s two-year notes yielded 98 basis points more than their German equivalents.

German Confidence

German consumer confidence will jump to 7.4 in December, from 7.1 last month, GfK said today, citing the company’s sentiment survey of about 2,000 people. That’s the highest since 2007.

Germany sold 3.65 billion euros of 10-year bunds at an average yield of 1.69 percent today, down from 1.71 percent at a previous sale on Oct. 30. Investors bid for 1.66 times the securities allocated.

Volatility on Dutch bonds was the highest in euro-area markets today, followed by those of Finland and France, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.

Spain’s bonds returned 11 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italy’s earned 7.7 percent, while Germany’s lost 1 percent.

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