Spanish and Italian bonds rallied as the two nations sold a combined 14 billion euros ($18.8 billion) of bills, allaying concern that political turmoil in both countries would damp demand for their debt.
The European Central Bank may be forced to choose “the nuclear option” of purchasing government bonds as the Greek debt crisis deepens, a decision that would weaken the euro, according to Societe Generale SA.
Spanish and Italian bonds rose on speculation the European Central Bank will augment the firepower of the region’s bailout fund as policy makers step up efforts to contain contagion from the debt crisis.
Treasury 10-year yields were within six basis points of a record low before a government report that economists said will show claims for jobless benefits rose last week, underpinning demand for the safest assets.
Stresses in the global financial system have stopped easing as European policy makers signal they’re unlikely to extend a third round of unlimited loans to the region’s banks and as bond yields in Spain and Portugal begin to rise again.
Spain’s bonds led gains among the government securities of Europe’s most-indebted nations amid speculation the country is poised to ask for a sovereign bailout that will trigger European Central Bank purchases of its debt.
Irish and Portuguese bonds rose, narrowing the yield difference with benchmark German bunds, amid speculation the European Central Bank bought more assets of high-deficit nations to stem the debt crisis.