Bond yields fall on hope of cheaper eurozone borrowing

Bond trader in Madrid
Image caption The bond markets have welcomed the G20 communique, despite its lack of detail

Spanish and Italian bond yields have fallen, on hopes that the G20 summit in Mexico saw eurozone nations move closer to a deal on lowering government borrowing costs across the region.

In a final G20 communique , world leaders said the eurozone was taking "important steps... that lead to sustainable borrowing costs".

Media outlets have speculated this will mean rescue funds being used to buy government bonds.

However, G20 leaders gave no details.

German question

The yield on Spanish 10-year bonds fell to 6.93% on Wednesday, dropping below the 7% level seen as unsustainable in the long-run.

For Italian bonds of the same maturity, the yield was down to 5.84%.

These yields give an indication of the level of concerns in a country's finances, as investors demand higher returns as worries increase. A government's cost of borrowing is only known when it sells bonds at an auction.

Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is miniscule.

According to press reports, eurozone leaders have moved closer to agreeing that the two bailout funds, the European Financial Stability Facility (EFSF) and the forthcoming European Stability Mechanism (ESM), will be able to buy the sovereign bonds of struggling member states on the open market.

The aim being that such a move would reduce the borrowing costs of nations such as Spain and Italy, as it would help to lower the yields on the bonds.

The EFSF and ESM have combined funds of about 500bn euros ($634bn; £404bn).

However, other reports have said that Germany - the eurozone's strongest economy - is yet to back the plan.

With German Chancellor Angela Merkel due to meet French President Francois Hollande on Friday, together with Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy, it is expected that the idea of using the bailout funds to buy up bonds will be discussed again then.

Yet while bond prices have eased, some analysts have not given the possibility a warm welcome.

JP Morgan senior economist Malcolm Barr said: "It is rather disappointing that such a limited and unimaginative step should be tabled at this stage, the crisis demands a more profound response."

Fed hopes

Analysts said bond yields were also falling on expectation that the Federal Reserve, the US central bank, will announce an extension to its current $400bn (£254bn) bond buying programme.

The Fed has been selling short-term US bonds and buying longer-term ones since September, under the scheme which has been dubbed "Operation Twist".

By buying longer-term bonds, the Fed has been pushing their price up, and lowering the interest rate or yield.

The aim is to help keep long-term interest rates low, thereby boosting mortgage lending and loans to businesses.

The G20 communique, which was released on Tuesday night following the end of the two-day gathering of world leaders in Mexico, also welcomed continuing efforts in the eurozone to develop fiscal and economic integration.

It said: "We fully support the actions of the euro area in moving forward with the completion of the economic and monetary union.

"Towards that end, we support the intention to consider concrete steps towards a more integrated financial architecture, encompassing banking supervision, resolution and recapitalisation, and deposit insurance."