Spanish Bonds Rise as Mersch Says ECB to Expand Purchases

Spanish government bonds rose for a fourth day as European Central Bank Executive Board member Yves Mersch said officials will extend their stimulus program by purchasing asset-backed securities next week.

Italy’s 10-year yield reached the lowest in almost a month. The bonds have risen since ECB President Mario Draghi said last week officials were unanimous on being willing to add stimulus if needed, and that current measures would expand the ECB’s balance sheet by as much as 1 trillion euros ($1.2 trillion), stoking speculation about large-scale sovereign-bond purchases. Mersch said late yesterday that buying government bonds was a “theoretical option.”

“It looks like the QE expectations -- after the comment from Mersch, but especially since the last ECB meeting when a balance sheet target was reinforced with specific references -- are driving the market,” said Jose Miguel Rodriguez, an interest-rate strategist at Banco Bilbao Vizcaya Argentaria SA in Madrid.

Spain’s 10-year yield dropped three basis points, or 0.03 percentage point, to 2.10 percent as of 4:10 p.m. London time. The 2.75 percent bond due in October 2024 rose 0.225, or 2.25 euros per 1,000-euro face amount, to 105.815. The rate on equivalent Italian securities fell two basis points to 2.33 percent, the lowest level since Oct. 15.

Germany’s 10-year yield was little changed at 0.83 percent after reaching a record-low 0.715 percent on Oct. 16.

Spread Narrows

The yield difference between Spanish and German 10-year securities narrowed two basis points to 127 basis points, and touched 125 basis points, the least since Nov. 3. The spread will tighten to less than 100 basis points by year-end, BBVA’s Rodriguez said.

Spain plans to auction 10-year bonds linked to European inflation on Nov. 13, the Madrid-based Treasury said in a statement on its website today. The securities will have a “real” coupon of 1.8 percent and will mature in November 2024, it said. Spain previously sold the securities on July 10 at an average yield of 1.459 percent.

Since June, the ECB has expanded stimulus measures in an effort to revive the euro-region economy and bring inflation closer to the central bank’s target of just under 2 percent.

‘Price Stability’

The ECB’s package of measures includes “a purchase program, which we started with covered bonds a few weeks ago and which we will continue in one week” with asset-backed securities, Mersch said in a speech in Herrenberg, Germany. They will help “to guarantee price stability in the euro area,” he said.

“There hasn’t been a decision to buy government bonds,” Mersch said. “It is a theoretical option if the situation deteriorates.”

Consumer prices in the 18-nation euro area rose 0.4 percent in October from a year earlier, the European Union’s statistics office in Luxembourg will confirm this week, while other data will show the economy expanded 0.1 percent in the third quarter, according to separate Bloomberg surveys of economists.

“These words could potentially be heralding quite a change for Mersch,” Rabobank International analysts, including London-based head of European rates strategy Richard McGuire, wrote in a note today. “Given that we had highlighted him as one of the swing voters on the Governing Council, he could potentially be a lead indicator of the three ‘Maybes’ moving into the ‘Yes’ camp.”

ECB Rates

The ECB left its main refinancing rate at a record-low 0.05 percent last week and the deposit rate at minus 0.20 percent.

Germany sold 905 million euros of index-linked bonds due in April 2030 today with a real yield of minus 0.12 percent. The nation is scheduled to sell 5 billion euros of notes due in December 2016 tomorrow. The Netherlands auctioned 1.29 billion euros of debt maturing in January 2047 today at an average yield of 1.816 percent, the lowest since Bloomberg began compiling the data in 2005.

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

Portugal is scheduled to auction as much as 1 billion euros of 10-year securities tomorrow. The yield on Portuguese bonds due in February 2024 dropped four basis points to 3.20 percent.

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