Italy bonds gain as ECB readies asset buying; Greek debt rallies

Italian and Spanish bonds advanced for the first time in three days after the European Central Bank said a legal act enabling it to buy covered bonds, a component of its stimulus program, will come into force tomorrow.

Greek government bonds rallied, paring the biggest weekly decline in more than two years, after ECB Executive Board member Benoit Coeure said officials will start the next phase of bond-purchase stimulus in coming days. Benchmark German 10-year bunds fell for a second day, trimming a weekly advance that pushed the yield to a record low yesterday amid Greece’s desire to exit its bailout and reports signaling the euro area is heading for another recession.

“The retracement started this morning and got a bit of momentum” on Coeure’s comments, said Luca Cazzulani, a senior fixed-income strategist at UniCredit Global Research in Milan. “The situation is totally different” from 2012, he said.

Italy’s 10-year yield fell six basis points, or 0.06 percentage point, to 2.52 percent at 1:15 p.m. London time, cutting its increase this week to 20 basis points, the most since the five days through Sept. 12. The 3.75 percent bond due September 2024 rose 0.515, or 5.15 euros per 1,000-euro ($1,282) face amount, to 110.80.

The rate on similar-maturity Spanish bonds slid three basis points to 2.19 percent. That’s more than 5 percentage points below its peak of 7.751 percent at the height of the sovereign crisis in 2012.

Asset Program

ECB officials will “start within the next days to purchase the assets foreseen in our new asset programs with the objective to steer the balance sheet toward higher levels and improve transmission to the real economy,” Coeure told reporters in the Latvian capital Riga. He was referring to the ECB’s plan to buy asset-backed securities and covered bonds.

Euro-area government bonds have returned 10 percent this year, compared with 2.7 percent in 2013, according to Bloomberg World Bond Indexes. The average yield to maturity on the region’s securities was at 1.1 percent yesterday after reaching a record-low 1 percent last month, according to Bank of America Merrill Lynch indexes. That’s down from 5.38 percent in 2000, the gauges show.

Five years ago, a change of government in Greece set in motion the debt crisis when the new administration unveiled a budget deficit that was larger than previously reported by its predecessor. The country was eventually granted a 240 billion-euro lifeline that has kept it afloat since 2010. The crisis spread, pushing borrowing costs up across the region with Portugal and Ireland also receiving bailouts.

Greek Reform

Greek bonds revived memories of that turmoil after euro-area finance ministers clashed with the nation’s leaders over their plan to leave their safety net, sparking concern that it won’t be able to finance itself at sustainable rates without external support. The lack of supervision may lead to the country backtracking on reforms agreed with the European Union and the International Monetary Fund.

While Ireland’s 10-year yield is set for its biggest weekly increase in more than a month, at 1.78 percent, the rate is more than 12 percentage points less than its peak 14.219 percent set in July 2011. Similar-maturity Portuguese debt yielded 3.36 percent today, from a record 18.289 percent in January 2012.

The rally in euro-area bonds started with ECB President Mario Draghi’s 2012 pledge to do whatever it takes to safeguard the region’s monetary union. They’ve been further supported as the economic recovery lost momentum, with policy makers cutting interest rates and pledging to provide more stimulus as needed to get inflation toward the central bank’s 2 percent goal.

Crisis Comparison

This week’s selloff in higher-yielding debt is not comparable to the crisis that brought the region to the brink of collapse, Royal Bank of Canada said, even as it urged caution.

“Absolute yields are still low, many positive aspects such as the euro weakness did not have a chance to filter through to economic activity and the banking system should be in a much more stable situation now,” Peter Schaffrik, London-based head of European rates strategy at RBC Capital Markets, wrote in a client note dated yesterday. “We urge investors to keep perspective.”

Greece’s 10-year yield slid 79 basis points today to 8.17 percent, cutting the weekly increase to 157 basis points, the most since May 2012. It earlier reached 9.33 percent, the highest since Jan. 17.

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

Belgium’s 10-year yield increased three basis points to 1.22 percent and the rate on equivalent French bonds rose three basis points to 1.29 percent. [Bloomberg]

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