Bundesbank puts a damper on bond rally

Spain’s risk premium continued to narrow on Monday as hopes grew that the European Central Bank would eventually step in to buy government bonds issued by financially distressed euro-zone members.

However, the rally was cut short after the ECB said it was premature to speculate on plans to revive its bond-purchasing program, while the Bundesbank continued to resist such a move.

The yield on the benchmark Spanish 10-year government bond eased to 6.282 percent, below the seven-percent level that is widely considered to be unsustainable. The yield hit a euro-zone record high of 7.751 percent on July 25.

As a result of the fall in the benchmark yield, the spread with the German equivalent declined by 17 basis points from Friday’s close to 477, having at one point hit 458 basis points. The yields of shorter maturities also eased, as did Italy’s risk premium.

The detonator behind the latest reprieve for Spain’s under-pressure sovereign debt was a report over the weekend by German weekly Der Spiegel saying that the ECB plans to establish yield levels that will trigger intervention.

In response, the ECB quashed speculation as to how it plans to act. “It is absolutely misleading to report on decisions that have not yet been taken and also on individual views, which have not yet been discussed by the ECB’s Governing Council, which will act strictly within its mandate,” Bloomberg quoted an ECB spokesman as saying. “As far as recent statements by government officials are concerned, it is also wrong to speculate on the shape of future ECB interventions,” the statement said.

“Monetary policy is independent and undertaken strictly within the ECB mandate,” the statement added.

ECB President Mario Draghi said in July the bank would do everything within its powers to ensure the euro survives but subsequently conditioned any intervention to a prior request by governments for assistance of this nature from the European rescue funds.

In an interview published Sunday by Spanish newswire EFE, Economy Minister Luis de Guindos said he believes the ECB will release details of its intervention plans at its Governing Council meeting slated for September 6, the same day on which Spanish Prime Minister Mariano Rajoy is due to meet with German Chancellor Angela Merkel in Madrid.

Thereafter, the Eurogroup and Ecofin will define the conditions under which euro-zone members can tap the rescue funds for market intervention in the second week of September. De Guindos said Spain will then weigh up its options based on the framework decided for intervention.

Germany also expressed surprise at the Der Spiegel report. “I am not aware of such plans,” German Finance Ministry spokesman Martin Kotthaus told a news conference in Berlin. “In purely technical and abstract terms, such an instrument would be very problematic. But I don’t know of any proposals along such a line.”

The Bundesbank also remained critical of any move by the ECB that would breach its strict mandate of ensuring price stability in the euro zone by providing financial support to governments. “The Bundesbank remains critical of the purchase of sovereign bonds of the euro system, which involves considerable risks for stability,” the German central bank said in its monthly report issued Monday.

The improvement in the sovereign debt markets was not matched by the stock market. After gaining 7.28 percent last week, the blue-chip Ibex 35 index closed Monday down 1.21 percent at 7,469.60 points after opening 0.31 percent to the good and after having been up as much as 1.11 percent.

The market was led lower by the banks. Bankia shed 4.69 percent, Banco Popular dropped 2.07 percent, BBVA lost 2.15 percent and Santander gave up 1.38 percent.