German two-year notes advanced as European Central Bank council member Athanasios Orphanides said investors may have overreacted in pricing in higher interest rates last week after the central bank’s last meeting. Today’s gains pushed yields down from a one-year high. There may have been an “overreaction to the underlying message” and the ECB’s statement last week was not “overly hawkish,” Orphanides said in a Jan. 14 interview in Frankfurt published today. Spanish bonds fell after the government decided to cancel two auctions scheduled for this week and replace them with offerings through banks. “Orphanides doesn’t tend to be in the hawkish camp, but he’s the first ECB person to tell us the market has over- reacted,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “He’s given the market reason to put on some corrective trades.” German two-year yields dropped four basis points to 1.11 percent as of 10:45 a.m. in London, after climbing to 1.2 percent, the most since Jan. 19, 2010. The 1 percent security due December 2012 gained 0.08, or 80 euro cents per 1,000-euro ($1,328) face amount, to 99.79. The 10-year yield fell one basis point to 3.03 percent. The yield on Germany’s two-year securities surged last week by the most in 17 months as ECB President Jean-Claude Trichet said inflation risks “could move to the upside” and a report showed Europe’s largest economy expanded last year at the fastest pace in two decades. Spanish Bond Sale Portugal’s 10-year yield decreased two basis points to 6.98 percent, while Spanish securities with a similar maturity yielded 5.38 percent, one basis point higher than on Jan. 14. The Greek yield was eight basis points lower at 11.17 percent. That pushed the extra yield, or spread, that investors demand to hold the securities instead of bunds below 800 basis points for the first time since Oct. 29. Spain’s syndicated sale will replace two auctions of bonds due in 2020 and 2024 that were scheduled for Jan. 20, according to a finance ministry official, who declined to be named citing policy. The transaction will be a similar size to a sale in January 2010, he said, when the Treasury sold 5 billion euros of securities. The decision represents an effort to capture lower yields after successful debt sales in the region last week, according to WestLB AG. Securing Funding “Spain has a lot of issuance to do in 2011 and they want to secure as much funding as soon as possible in January,” said Michael Leister, a fixed-income analyst at WestLB in Dusseldorf, Germany. The timing is “opportunistic” after the nation held successful auctions last week with Portugal and Italy, he said. German Finance Minister Wolfgang Schaeuble said on radio station Deutschlandfunk that the nation opposes increasing the size of the euro area’s bailout fund, as European Union leaders start discussions over a new strategy to tackle the region’s debt crisis, possibly including a larger rescue package. “For today we can expect some more uncertainty coming into the market as Germany is very reluctant to make this fund even bigger,” said Glenn Marci, a strategist at DZ Bank AG in Frankfurt. “If an agreement is reached, the market will appreciate this new feature and can push bund yields higher.” Euro-area finance ministers meet at 5 p.m. today in Brussels. Luxembourg Prime Minister Jean-Claude Juncker, the chairman, and European Union Economic and Monetary Commissioner Olli Rehn will brief the press in late evening. Orphanides Comments While inflation “is somewhat higher than we would like it to be,” policy makers “expect that overall inflation will actually be coming down,” Orphanides said. “We do not see any need to change the view that the current degree of accommodation in our monetary policy is consistent with price stability in the euro area in the medium term.” Euribor futures rose, reversing a decline. The implied yield on the contract expiring in December 2011 was down three basis point to 1.64 percent, suggesting investors pared bets on the ECB raising rates this year. Germany’s bonds have lost 0.6 percent this month so far, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt has returned 0.6 percent since the end of 2010 while Italian securities made investors 0.8 percent, the indexes show. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

Source