Bloomberg News

Italian Bonds Fall as Demand Drops at 10-Year Sale; Bunds Gain

August 30, 2011

Aug. 30 (Bloomberg) -- Italian bonds fell for a seventh day, the longest losing streak since February, as demand weakened at the first auction of 10-year securities since the European Central Bank began buying the nation’s debt.

German bunds advanced, paring yesterday’s drop, after a report showed confidence in the euro-region’s economic outlook plunged in August. Italy’s 10-year yields climbed to a three- week high after Prime Minister Silvio Berlusconi bowed to demands from his coalition ally to overhaul a 45 billion euro ($65 billion) austerity plan that had persuaded the ECB to support the nation’s bonds. Italy sold 7.74 billion euros of debt maturing in 2014, 2018 and 2022.

“The market is still wary about being long Italian bonds because there’s more supply coming,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. “There was a muted response to the auction. Investors are nervous because the ECB has not been as active as some might have hoped. Consumer-sentiment data and the Italian auction are combining to support bunds.”

Italy’s 10-year bond yield increased two basis points to 5.11 percent as of 4:03 p.m. in London. They earlier climbed to 5.16 percent, the highest since Aug. 10. The 4.75 percent security due in September 2021 fell 0.150, or 1.50 euros per 1,000-euro face amount, to 97.70. Yields on two-year notes rose three basis points, to 3.44 percent.

Demand Falls

The nation sold 3.75 billion euros of 5 percent bonds maturing in March 2022 at an average yield of 5.22 percent. Investors bid for 1.27 times the amount on offer. That compares with a bid-to-cover ratio of 1.38 at the prior auction of similar-dated debt on July 28, which was sold at 5.77 percent.

“The bid-to-cover ratios are slightly lower, which may pressure the bonds,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “It looks as if the Italian Treasury only needed to make moderate concessions in order to get their bonds sold, and the market is not in any way boycotting this auction.”

Italy also auctioned 2.99 billion euros of notes due in July 2014 at an average yield of 3.87 percent, and 995 million euros of floating-rate securities due in April 2018 at a yield of 4.52 percent.

The yield on the 10-year bund dropped eight basis points to 2.15 percent. It fell to a record 2.03 percent on Aug. 18. Yields on two-year notes were also eight basis points lower at 0.66 percent. They declined to 0.54 percent on Aug. 18, the least since June 30, 2010.

Consumer Sentiment

An index of euro-region executive and consumer sentiment fell to 98.3 from a revised 103 in July, the European Commission in Brussels said today. That’s the lowest level since May 2010.

Confidence among U.S. consumers plunged in August to the lowest in more than two years, a separate report showed.

Spain plans to sell up to 4 billion euros of 4.25 percent notes due in October 2016 on Sept. 1. Spanish 10-year bond yields were little changed at 5.01 percent, while two-year yields fell two basis points to 3.32 percent.

“Further selling pressure is on the cards given the Spanish five-year auction,” Michael Leister, a fixed-income strategist at WestLB AG in London, wrote in a note to investors.

The difference in yield, or spread, between Italy’s 10-year bonds and similar-maturity German bunds widened nine basis points to 2.97 percentage points. It reached 3 percentage points, the most since Aug. 9. The spread between Spanish and German 10-year bonds expanded eight basis points to 2.87 percent.

ECB Purchases

The ECB has restrained Italian and Spanish borrowing costs in the past three weeks by buying bonds in the secondary market after contagion from the sovereign-debt crisis sent yields to euro-era records at the start of this month.

The Frankfurt-based ECB said yesterday it settled 6.65 billion euros of bond purchases in the week through Aug. 26, down from 14.3 billion euros in the previous week.

Berlusconi and Italian Finance Minister Giulio Tremonti held a seven-hour meeting yesterday with officials of the Northern League, a coalition ally that had opposed key elements of the austerity plan, which aimed to balance the budget in 2013. They agreed to drop a tax on the highest earners and limit funding cuts to regional governments.

The country’s weak growth makes deficit and debt goals “difficult,” Bank of Italy Deputy Director General Ignazio Visco said today. Speaking in testimony before the Senate in Rome, Visco said Italy’s debt has been the country’s biggest problem for three decades.

German government bonds have returned 5.2 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg, while Treasuries have returned a gain of 7.1 percent. Italian bonds have gained 0.4 percent, the indexes show.

--Editors: Keith Campbell, Mark McCord.

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Keith Campbell at k.campbell@bloomberg.net


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