Spanish Bonds Rise for Second Week With Italy’s on ECB Support

Spanish and Italian government bonds advanced for a second week on speculation the European Central Bank will remain supportive of sovereign debt, even as it refrained from adding stimulus and faced a legal challenge.

The nations’ two-year yields dropped to the lowest on record after the ECB held interest rates at a record low on Feb. 6. German bunds were little changed this week as the country’s top court sought guidance from the European Court of Justice on the legality of the ECB’s bond-buying plan. Greek 10-year yields posted the biggest weekly drop since May after officials said European authorities may extend the maturity on rescue loans.

“Investors still need a return and we’re not beset by such uncertainty that we are fleeing to safety,” said Richard McGuire, a fixed-income strategist at Rabobank International in London. “That may be because ultimately the market is of a view that if push comes to shove the ECB will unveil additional measures. Peripherals are in this happy middle,” he said referring to the bonds of the region’s most indebted nations.

The Spanish 10-year yield fell 15 basis points, or 0.15 percentage point, in the week to 3.58 percent at 4:58 p.m. London time yesterday, the lowest level since February 2006. The 3.8 percent security due in April 2024 rose 1.26, or 12.60 euros per 1,000 euro ($1,362) face amount, to 101.825.

Two-year yields tumbled to 0.87 percent yesterday, the least since Bloomberg began collecting the data in 1993. Spain auctioned three- and five-year notes at the lowest yield on record on Feb. 6.

Outperforming Periphery

Italy’s 10-year yield dropped eight basis points this week to 3.69 percent, while the rate on the nation’s two-year notes slid as low as 0.81 percent. German 10-year yields were at 1.66 percent after touching 1.60 percent on Feb. 5, the least since Aug. 1. The Greek 10-year yield tumbled 85 basis points to 7.77 percent.

Higher yielding euro-area debt is outperforming bunds this year even as inflation in the region eased to 0.7 percent last month, matching the least since 2009. Spanish bonds returned 3.2 percent this year through Feb. 6, while Italy’s gained 2.4 percent, according to Bloomberg World Bond Indexes. German bunds rose 1.8 percent.

ECB President Mario Draghi said on Feb. 6 that the central bank could take action to counter low inflation next month.

Judges at Germany’s Federal Constitutional Court expressed doubts about the legality of the ECB’s bond-purchase program in a six to two vote, the court said yesterday. At the same time the court stopped short of overstepping its own authority and asked for a ruling from the European Court of Justice in Luxembourg, made up of judges from all 28 EU countries.

Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc both said the Court of Justice was unlikely to block the still-untapped program.

Germany will auction 1 billion euros of inflation-linked notes while the Netherlands is scheduled to offer as much as 3 billion euros of debt due in 2019 on Feb. 11. It will also sell securities due in 2016 the next day and Italy will auction bonds on Feb. 13.

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