Bloomberg News

Italy Bonds Fall a 2nd Day on Downgrade, Greek Default Concern

September 20, 2011

Sept. 20 (Bloomberg) -- Italian bonds fell for a second day after Standard & Poor’s cut the country’s credit rating and Greece prepared for further talks with its main creditors to avoid a default.

German two-year notes, perceived to be among Europe’s safest debt securities, yielded less than 0.5 percent for a second day. Italian debt declined even as the European Central Bank was said to be buying the securities. S&P cut Italy’s rating to A from A+, saying slower growth and a “fragile” government may derail the nation’s ability to reduce its debt burden. Portugal’s 10-year yield rose by the most in two weeks.

“It’s the downgrade of Italy and the latest, or no, news from Greece” that’s driving bond markets, said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt. “Everybody is looking at what’s going on with Greece.”

The Italian 10-year yield rose nine basis points to 5.68 percent at 12:44 p.m. in London. The 4.75 security due in September 2021 fell 0.645, or 6.45 euros per 1,000-euro ($1,369) face amount, to 93.575.

The two-year yield climbed 10 basis points to 4.29 percent. Portugal’s 10-year yield increased 40 basis points to 11.66 percent, the biggest increase since Sept. 5 when it jumped 51 basis points.

Ten-year German bund yields were little changed at 1.80 percent, after being as low as 1.73 percent. The yield fell to a record low 1.68 percent on Sept. 13. Two-year yields climbed one basis point to 0.47 percent.

Spread Widens

Bunds erased their advance today as the Stoxx Europe 600 Index gained 1.3 percent, rebounding from a 2.3 percent drop yesterday and sapping demand for German debt securities as a haven. The euro snapped two days of losses versus the dollar.

The extra yield, or spread, that investors demand to hold Italian 10-year bonds instead of similar-maturity German bunds widened nine basis points to 388 basis points.

The ECB bought Italian bonds today, according to five people with knowledge of the transactions, who asked not to be identified because the deals are confidential. A spokeswoman for the central bank declined to comment.

S&P’s decision is “not positive news for Italy, which is struggling to attract investor demand for its government bonds,” Alessandro Giansanti, a senior strategist at ING Groep NV in Amsterdam, wrote today in a note to clients. “We expect further widening of Italian spreads.”

Dutch government bonds, which have the highest AAA rating, were little changed, after gains that earlier pushed the 10-year yield down six basis points to 2.20 percent, the lowest since Sept. 13. The yield was at 2.26 percent.

Greek Call

Greek Finance Minister Evangelos Venizelos is scheduled to hold a conference call with the heads of the European Union, ECB and International Monetary Fund mission to Athens at 8 p.m. Athens time. The parties had “substantive” discussions yesterday, the finance ministry said in a statement.

Greece’s Prime Minister George Papandreou isn’t considering holding a referendum on whether to exit the euro, government spokesman Ilias Mosialos said, denying a report in the Kathimerini newspaper.

Two-year Greek notes dropped for a second day with the yield climbing 39 basis points to 61.77 percent. The yield climbed to a record 84.52 percent on Sept. 14.

Spanish securities were little changed after the nation sold 4.46 billion euros of 12-month and 18-month bills. The 10- year yield rose one basis point to 5.36 percent.

Spanish Auction

The Treasury sold 3.59 billion euros of 12-month bills at an average yield of 3.591 percent, compared with 3.335 percent in an Aug. 16 auction. It also issued 18-month debt at 3.807 percent, up from 3.592 percent in August. Demand for the 12- month bills was 2.78 times the amount sold, up from 2.14 times, with the 18-month debt attracting bids of 2.74 times from 3.23.

German government bonds have returned 2.7 percent in September, extending this year’s gain to 8.1 percent, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Treasuries gained 1.4 percent this month while Greek bonds have tumbled 22 percent.

-- With assistance from Maria Petrakis and Natalie Weeks in Athens, Keith Jenkins and Gabi Thesing in London and Jeffrey Donovan in Rome. Editors: Matthew Brown, Mark McCord

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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