Spanish Bonds Drop as Investors Lose Faith QE Will Lower Yields

Spanish government bonds fell, with 10-year yields climbing the most in three weeks, as speculation the European Central Bank will intensify its stimulus program failed to convince investors yields can fall further.

Italian 10-year securities also dropped even after ECB President Mario Draghi said on Nov. 6 officials were willing to introduce further measures such as sovereign-asset purchases, or quantitative easing, if needed. German bunds were little changed after the European Commission cut its growth forecasts for the euro area as the bloc’s largest economies cool. The benefits of the central bank extending its purchases to government bonds is unclear, Italian debt chief Maria Cannata said on Nov. 3.

“You’ve got the hopes for QE that are out there,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. “On the other hand, the bond market is a little more sanguine on what might happen next and taking the view that whatever they do will be a long time coming. People are probably feeling uncomfortable with the idea they’d want to chase down these sort of yields from here before year-end.”

Spain’s 10-year yield rose eight basis points, or 0.08 percentage point, to 2.16 percent at 5 p.m. London time yesterday. That’s down from 4.15 percent at the end of last year. The 2.75 percent security declined 0.75, or 7.50 euros per 1,000-euro ($1,243) face amount, to 105.275.

Yields Tumbled

Euro-area yields have tumbled since Draghi announced on Sept. 4 that the central bank would buy covered bonds and asset-backed securities to stoke inflation and boost the economy. The average yield on euro-region government debt dropped to 1.01 percent on Oct. 1, the lowest since at least 1994, and was at 1.07 percent yesterday, according to Bank of America Merrill Lynch indexes.

Preparations for more expansive action by the ECB and a 1 trillion-euro target for boosting the balance sheet are stoking speculation that momentum is shifting toward a proposal for broader bond-buying. Italian 10-year yields declined three days out of five, yet even so the rate rose three basis points to 2.38 percent this week.

Spanish securities earned 13 percent this year through Nov. 6, Bloomberg World Bond Indexes show. Germany’s returned 8 percent and Italy’s 12 percent.

A report on Nov. 14 will confirm consumer prices in the 18-member currency bloc rose an annualized 0.4 percent in October, up from 0.3 percent a month earlier, according to the median estimate of analysts in a Bloomberg News survey. The euro-area economy expanded 0.7 percent in the third quarter, an initial estimate will show, according to a separate survey.

The Netherlands is due to auction 2 billion euros of 2047 bonds on Nov. 11. Germany is set to offer index-linked debt the same day and 2016 notes the following day, when Portugal is to sell 10-year bonds. Italy will sell securities on Nov. 13.

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