The ECB bought Greek bonds in belief it would show the market it meant business. The market smashed that pitch to high heavens.

Nonetheless, Bloomberg reports Italian Bonds Snap Six-Day Drop on Speculation ECB Bought Country’s Debt

Italian and Spanish bonds rose on speculation the European Central Bank bought the debt of the euro region’s most-indebted nations to stabilize markets amid concern that the debt crisis is worsening.

Greek 10-year yields fell the most in almost two weeks while equivalent-maturity Spanish yields retreated from a euro- era record reached earlier. Italian bonds rose, with yields below 6 percent after breaching the level for the first time since 1997. The 27 European Union finance ministers continued meetings today after euro-region officials said late yesterday that they may revive bond buybacks to ease Greece’s debt woes. An ECB press officer declined to comment on whether it bought so-called peripheral euro-region bonds today.

“The suspicion has to be that there has been some unofficial central bank activity this morning, be that the ECB, or Asian central banks or a combination of the two,” said John Davies, a fixed-income strategist at WestLB AG in London. “The hurdles of the T-bill auctions from Italy, Greece and, to a lesser degree, Belgium, were overcome successfully.”

Yields on 10-year Italian bonds declined for the first time in seven days, falling 12 basis points to 5.56 percent as of 4:33 p.m. in London. The yields climbed as high as 6.02 percent, widening the spread over German bunds to 318 basis points, a euro-era record. Spanish 10-year yields were 18 basis points lower at 5.85 percent, after surging to 6.31 percent, the most since 1997.

“Speculation of central bank involvement encouraged short positions in peripherals to be closed,” said Peter Chatwell, a strategist at Credit Agricole Corporate & Investment Bank in London. “If the ECB were to announce an intention to buy, then it would have the same effect: shorts would scuttle to cover their positions.”

Credit-default swaps on Greece surged 150 basis points to 2,453, signaling an 88 percent probability of default within five years, according to CMA prices in London, before settling at 2,324, up 21 basis points from yesterday.

Swaps on Ireland slid 15 basis points to 1,000 after reaching 1,086, Italy slipped 16 to 286 after rising to 343. Portugal dropped 89 basis points to 1,048 after rising to 1,187 and Spain reached 380 basis points before falling 29 to 320, according to CMA data.

EU Will Support Banks Failing Stress Tests

Market “support” does not end with government bond purchases. The Wall Street Journal reports EU Will Support Banks Failing Stress Tests

European Union governments committed at a meeting Tuesday to backstop banks that fail stress tests.

Ahead of the publication of financial-sector stress test results on Friday, officials said all vulnerable banks must recapitalize themselves, be recapitalized by their governments or restructure.

“These measures privilege private-sector solutions but also include a solid framework for the provision of government support in case of need, in line with state aid rules,” according to a statement from the economic bloc’s 27 finance ministers.

At the meeting, ministers said their governments either have action plans ready or would have them in time for publication of the test results, said Polish Finance Minister Jacek Rostowski. However, he added: “It’s not the case that everything has to be in place … although in the majority of countries most things are in place.”

The EU Commission’s internal market commissioner also put rating agencies on warning in comments following the meeting, saying that a proposal to increase regulatory oversight would come this November.

“I want to have transparency concerning their methods, particularly when they’re rating countries,” said Commissioner Michel Barnier. “You don’t rate a country the same way you rate a business or a product.”

Questions of the Day

  1. Is support for banks and bond buying unlimited?
  2. Buying government bonds failed before, and spectacularly at that, so why would it work now other than for a day or two as weak shorts get pushed out of the market?
  3. For now, these actions have calmed the bond an equity markets. How long will that last?

For more on Commissioner Michel Barnier’s preposterous rating plan to prohibit rating agencies from rating the debt of countries in rescue programs please see Cardiac Arrest; Italy and Spain Close to the Abyss; EU Commissioner Seeks to Prohibit Agencies from Rating Debt of Countries in Rescue Programs

Mike “Mish” Shedlock
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