LONDON: Spanish bonds rallied to their strongest level in nearly three months on Thursday as investors gave a cautious welcome to details on the ECB's plans to ease pressure on troubled euro zone states by buying bonds.
Most of the rally came before the European Central Bank meeting, driven by leaks of the plan's detail, but the move continued as bank president Mario Draghi outlined a potentially unlimited bond buying programme.
"They still haven't spent a red cent yet but there is a pretty strong signal that they are standing behind the market and it's a much more bold approach than the ECB under (former president Jean-Claude) Trichet," a trader said.
The move was aimed at heading off the intense pressure that built up in July when fleeing investors pushed Spain's cost of borrowing up to unsustainable levels and threatened to force the country into a bailout the currency bloc could scarcely afford.
Ten-year Spanish bond yields fell to 6.1 percent, a level not seen since June 11 and down 36 basis points on the day, while two-year bonds showed smaller gains, falling 10 bps to 3.07 percent.
The comparatively smaller move in shorter-dated bonds reflected the fact that yields there had already tumbled from a peak of around 7 percent in the weeks preceding the ECB meeting and thus had less scope to fall further.
The removal of curve steepening positions, which were essentially bets that the ECB would disappoint and cause a selloff in longer-dated bonds, also added to the rally.
German Bunds, regarded as a safe haven within the euro zone, fell with futures, down more than a point to 140.27 and cash yields at a two-week high of 1.54 percent.
The true extent of the bullish sentiment towards riskier bonds will be tested in coming days as investors reflect on the number of hurdles that still need to be cleared before the ECB is able to begin buying Spanish debt, analysts said.
Draghi said the ECB would only help countries that signed up to and implemented strict policy conditions, with the euro zone's rescue fund also buying their bonds, and preferably with the IMF involved in designing and monitoring the conditions.
"Evidently the success of the whole enterprise still depends on whether Spain and Italy will seek a programme and whether or not member states can deliver on the conditionality," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
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Draghi also offered a lifeline to countries currently receiving bailout packages, namely Portugal and Ireland, stating that they would be eligible for bond buying support when they needed to start borrowing from the market again.
"That seems to offer a road to survival," Scicluna said.
Portuguese 10-year bond yields fell 44 bps to 8.58 percent, breaking for the first time below the 8.83 percent level seen when a bailout was requested in April 2011.
Though the fall in December German Bund futures was the largest in a month, the unwinding of safe haven positions had been accelerated by better-than-expected employment data from the US which tempered expectations of fresh stimulus by the Federal Reserve.
That heaped extra focus on Friday's non-farm payrolls report, the most closely followed US economic indicator, which is forecast to show an addition of 125,000 jobs in August.
"The US data we've had today has certainly helped to bear down on everything... (The ADP data) will have people revising their forecasts up for payrolls tomorrow," said Marc Ostwald, strategist at Monument securities in London.
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