Spanish, Italian notes fall as ECB debt-purchase optimism wanes

Aug. 9 (Bloomberg) -- Spanish and Italian two-year notes declined for a third day amid speculation the European Central Bank’s plan to purchase the nations’ securities won’t be sufficient to stem the regional debt crisis.

The notes underperformed their regional peers after an ECB quarterly survey of professional forecasters predicted the euro- area contraction this year will be worse than previously estimated. Spanish and Italian bonds jumped last week after ECB President Mario Draghi said the central bank may buy government debt in unison with the region’s bailout fund. Greek bonds rose even as the jobless rate climbed to a record.

“The market’s keeping a close eye on Italy and Spain,” said David Schnautz, a New York-based fixed-income strategist at Commerzbank AG. “The momentum since the ECB meeting is running out of steam. Spanish bonds are under some pressure. The market gets nervous when it sees double-digit increases in two-year yields.”

Spain’s two-year note yield climbed 18 basis points, or 0.18 percentage point, to 4.06 percent at 2:37 p.m. London time after falling to 3.38 percent on Aug. 6, the lowest level since May 9. The 4.75 percent bond due in July 2014 fell 0.345, or 3.45 euros per 1,000-euro ($1,231) face amount, to 101.28.

The Italian two-year note yield increased seven basis points to 3.26 percent after rising 16 basis points over the past two days.

The ECB said in its monthly bulletin today that it may intervene in bond markets in tandem with Europe’s bailout funds, only if troubled nations commit to improving their economies and fiscal positions.

‘Necessary Conditions’

“The adherence of governments to their commitments and the fulfillment by the European Financial Stability Facility/European Stability Mechanism of their role are necessary conditions,” the Frankfurt-based ECB said, echoing the comments made by Draghi on Aug. 2. The central bank “may undertake outright open market operations of a size adequate to reach its objective,” it said.

DBRS Inc., one of the four companies accepted by the ECB to rate the securities it takes as collateral, yesterday downgraded the credit ratings of Spain and Italy, citing a weakening growth outlook in the countries and deteriorating funding conditions.

Germany’s bunds swung between gains and losses. The 10-year yield was little changed at 1.42 percent after earlier rising as much as five basis points.

Greek Bonds

Greek 10-year bonds rose for a fourth day after the number of citizens without a job increased toward a quarter of the total workforce.

The jobless rate rose to 23.1 percent from 22.6 percent in April, the Athens-based Hellenic Statistical Authority said. That’s the highest level since the agency began publishing monthly data in 2004.

The yield on Greek bonds due in February 2023 dropped two basis points to 24.25 percent. The price gained 0.035 to 19.875 percent of face value.

German government bonds returned 3.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds fell 4.3 percent, and Italy’s rose 9.6 percent.

Bloomberg News

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