Bloomberg News

Italian Bonds Decline on Moody’s Rating Cut; German Bunds Drop

October 05, 2011

Oct. 5 (Bloomberg) -- Italy’s bonds fell after Moody’s Investors Service cut the nation’s credit rating by three levels and said it may lower those of other European countries with debt rankings below its top level.

Ten-year Italian yields climbed from near a two-week low even as the European Central Bank was said to buy the country’s government securities along with Spanish debt. German 10-year bonds fell for the first time in four days as European stocks rallied, damping demand for safer assets. Belgium’s bonds fell as euro-area services and manufacturing output shrank in September, adding to signs of a deepening economic slowdown.

“The Italian downgrade was probably anticipated by many people but three notches in one go is quite punchy,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “We’ve had some fairly disappointing data, it’s probably helping push spreads a little bit wider,” he said, referring to the yield difference between 10-year euro-region securities and German bunds.

Italian 10-year yields rose three basis points to 5.53 percent at 4:16 p.m. in London after falling to 5.48 percent on Oct. 3, the lowest level since Sept. 16. The 4.75 percent security due September 2021 dropped 0.235, or 2.35 euros per 1,000-euro ($1,335) face amount, to 94.670. Two-year rates were little changed at 4.24 percent.

Italian Spread

The spread between 10-year Italian and German bonds narrowed eight basis points to 369 basis points, after earlier widening to 384 basis points.

Moody’s said yesterday it cut Italy’s rating on concern Prime Minister Silvio Berlusconi’s government will struggle to reduce the region’s second-biggest debt pile.

All European nations with ratings below the Aaa level may face downgrades as governments face “a profound loss” in investor confidence due to the failure of policy makers to stop the debt crisis spreading, Moody’s said.

The potential for further downgrades “is worse news than the actual downgrade of Italy,” said Norbert Aul, a European interest-rate strategist at RBC Capital Markets in London. “Spain will be in the focus being on review for a downgrade by Moody’s. Two-thirds of Moody’s rationale for downgrading Italy can be applied to Spain as well.”

That may mean a cut of “two notches” for Spain, Aul said.

Spanish Bonds

Spain’s 10-year bond yields were little changed at 5.09 percent, after rising four basis points to 5.14 percent. Two- year notes yielded 3.49 percent.

The yield on Belgium’s 10-year bond increased 17 basis points to 4 percent after reaching 4.02 percent, the highest since Sept. 15.

Belgium has the second-highest rating at S&P, Moody’s and Fitch Ratings. S&P said June 14 there’s a one-in-three chance it will cut Belgium’s ranking within two years. Belgian Prime Minister Yves Leterme said yesterday that Dexia SA, the country’s biggest bank, plans to pool its troubled assets into a “bad bank” with guarantees from the French and Belgian governments.

Bailouts for Greece, Ireland and Portugal, and bond purchases by the ECB haven’t kept the debt crisis from threatening to engulf Italy and Spain. The ECB began buying Spanish and Italian securities on Aug. 8 to curb a surge in yields in the bonds of the two economies, according to traders who deal with the central bank.

The Frankfurt-based central bank bought Italian securities today, according to five people with knowledge of the transactions who asked not to be identified because the trades are confidential, and also purchased Spanish debt. A spokeswoman for the ECB declined to comment.

Bunds Slide

Germany’s 10-year yields fell 1.14 percentage points last quarter as the debt crisis intensified and data added to speculation the economy is slipping back into recession.

The 10-year bund yield climbed 11 basis points to 1.84 percent, after dropping to a record 1.636 percent on Sept. 23. Two-year yields rose four basis points to 0.50 percent.

The Europe Stoxx 600 Index gained 2.5 percent. European Union authorities are working on a plan to recapitalize the banking sector, said Antonio Borges, European department head at the International Monetary Fund.

Germany sold 4 billion euros of two-year notes today at a 0.46 percent, the lowest yield at an auction of the securities since Bloomberg began collecting the data in 1996. Investors submitted bids for 7.8 billion euros. The previous time Germany auctioned two-year notes, on Sept. 14, it sold 4.1 billion euros of the securities at an average yield of 0.51 percent.

Economic Slowdown

Markit Economics said today its composite index based on a survey of purchasing managers in services and manufacturing fell to 49.1 in September from 50.7 in the previous month. That’s less than an initial estimate of 49.2 published on Sept. 22. Another report showed retail sales in the 17-nation euro region declined in August.

The ECB is forecast to leave its benchmark rate at 1.50 percent at a meeting tomorrow, according to a Bloomberg survey of 52 economists. Five predicted the central bank will cut borrowing costs to 1.25 percent and six say it will slash the rate to 1 percent, the survey shows.

German government bonds have returned 8.7 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Italian bonds have lost 2.6 percent and Spain’s rose 5.3 percent.

--Editors: Mark McCord, Nicholas Reynolds

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net

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


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