Euro zone bonds rally after ECB debt buying

Thu, Dec 2, 2010, 00:00

BOND MARKETS:EURO ZONE GOVERNMENT bonds rallied yesterday as dealers said the European Central Bank had stepped up the buying of peripheral nations’ debt to steady the markets.

Irish, Portuguese and Spanish bond yields, which have an inverse relationship with prices, dropped sharply, aided by ECB buying and hopes that the central bank would announce an increase in its bond purchase programme today.

Portugal also successfully tapped the bond markets for fresh money as the country’s prime minister insisted Lisbon would not have to turn to the European Financial Stability Facility, the euro zone’s rescue fund, for emergency loans. The improving sentiment in the periphery was sparked initially by ECB president Jean-Claude Trichet, whose comments on Tuesday left open the possibility of an expansion of the central bank’s debt buying programme.

It marked a big turnaround in the markets following big rises this week in peripheral bond yields, including those of Italy and Spain, amid fears the debt crisis was spreading.

European stocks also rose on the back of expectations about ECB action, while markets in general were helped by reports that the US would be willing to back a bigger European financial stability fund through increased commitments to the International Monetary Fund.

In Dublin, the Iseq added almost 2 per cent, although the banks that comprise the financial sub-index trailed this, adding 1 per cent on average.

Willem Buiter, chief economist at Citigroup, said: “It is only the ECB that stands between us and multiple sovereign defaults, including some that may not be fundamentally warranted.”

The ECB had increased the buying of its bonds, traders said, in what some suggested was a deliberate move to press home to markets that it was ready to take necessary action to stem the crisis. “We have seen a lot of buying from the ECB,” said one dealer.

“They are buying Portugal and Ireland and want to make clear to the market that they are there as a backstop in this crisis.”

Steven Major, head of global fixed income research at HSBC, said: “Euro zone markets were due a correction, so it is not a surprise that bond yields fell ahead of the meeting of the ECB.”

Portugal’s auction of 12-month debt also improved sentiment as Lisbon borrowed € 500 million from the market with a strong bid-to-cover ratio of 2.5 times.

While Lisbon had to pay 5.28 per cent in yields, versus 4.81 per cent at a similar auction two weeks ago, strategists said the fact that the country managed to issue the debt in such volatile markets was a sign of success.

Portugal repeated denials it was under international pressure to seek a financial bailout after Standard Poor’s warned it could downgrade the country’s sovereign debt rating. Asked if his government was being pressed by European Union institutions to ask for a financial rescue, prime minister José Sócrates, said: “It is not true. There is no pressure. We don’t need outside help.”

His comments came shortly after S&P, the rating agency, warned it could downgrade Portugal’s long-and short-term sovereign debt ratings in the next three months. – Copyright The Financial Times Limited 2010

Fixing the Euro: What Europe's big guns said yesterday

You may think and you may sometimes reat that Europe is in chaos, disintegrating, the euro is about to disappear. This is wrong.

- Klaus Regling, head of the EU's temporary rescue mechanism

We are all determined. We are all in a  joint effort to achieve that stability within the zone.

French Economy Minister Christine Legarde

The Spanish economy can't be compared with the Irish or the Portugese.

- Jaime Guardiola, chief executive of Banco Sabadell, Spain's fourth-biggest commercial bank

Spain can deal with its problems by itself.

- Deutsche Bank chief executive Josef Ackerman