Bonds: Italian long-term Treasuries outperform on ECB speculation

Sovereign bonds recorded sharp gains on Tuesday following a Reuters report that corporate bond purchases were under consideration by the European Central Bank.

According to the news agency a decision to act on such deliberations could arrive as early as December this year. However, a follow-up report from The Wall Street Journal Europe citing sources indicated that no specific plans have been discussed nor is there a firm timetable for such a move.

The latter news was apparently confirmed on Wednesday morning as ECB Governing Council member Luc Coene told two Belgian dailies there were indeed no concrete proposals as of yet.

On Tuesday afternoon RBS’s Alberto Gallo issued a research note to clients explaining that investors seem to harbour doubts about the ability of the ECB's asset backed securities (ABS) purchase programme, which has already been announced, to work at the right pace, in turn possibly motivating the above deliberations.

In any case, the news led to a 20 basis point drop in the iTraxx Cross-over index and in turn dragged Italian and Spanish 10-year bond yields lower by 10 basis points each, Gallo explained.

Italian Treasury 10-year yields ended the day lower by 8 basis points at 2.51%, while those on similar maturity Spanish instruments fell by five basis points to 2.21%.

Italian bonds have under-performed their Mediterranean peers year-to-date. To take note of, there were reports on Tuesday that the ECB was purchasing covered bonds from Italy.

The yield on Portuguese 10-year bonds fell by six basis points to 3.42%.

Over on the other side of the Pond, existing US home sales grew at a 2.4% pace in September to reach a seasonally adjusted annual rate of 5.17m, growing at the fastest clip in the last 12 months and hitting back from an unexpected drop in August.

That saw the yield on the 10-year US Treasury note rise three basis points to 2.22%.

Of interest in the corporate debt patch, Petrobras, the Brazilian oil major, had its rating lowered overnight by Moody’s by one notch, to Baa2. Lower oil prices and weakness in the country’s currency will hamper the ability of the world’s most indebted oil major to tap international debt markets, the agency said.