Bloomberg News

Italian Bonds Fall a 5th Day Before Confidence Vote; Bunds Rise

October 13, 2011

Oct. 13 (Bloomberg) -- Italy’s government bonds fell for a fifth day as Prime Minister Silvio Berlusconi called for a confidence vote in Parliament tomorrow after failing to muster a majority on a legislative ballot this week.

The nation’s 10-year yields climbed to the highest level since August as the Treasury sold less than its maximum target in debt auctions today. Declines were tempered as the European Central Bank was said to purchase the country’s debt after the sales. German bunds gained as the ECB said the involvement of the private sector in bailouts through enforced losses was a risk to financial stability.

“In Italy, there is clear political risk and that’s pressuring the bonds,” said Achilleas Georgolopoulos, a fixed- income strategist at Lloyds Bank Corporate Markets in London. “It was obvious that the ECB would step in after the auction, that’s why they have the program.”

Italy’s 10-year yields climbed eight basis points, or 0.08 percentage point, to 5.82 percent at 4:38 p.m. London time, after rising to 5.86 percent, the highest since Aug. 5. The 4.75 percent bond due in September 2021 declined 5.25, or 5.25 euros per 1,000-euro ($1,373) face amount, to 92.645. Five-year rates increased nine basis points to 5.40 percent.

Berlusconi is struggling to convince investors he can cut Europe’s second-biggest debt load. Italy has been downgraded by the three main rating companies in the past month even after approving 54 billion euros in austerity measures.

Debt Sale

The Rome-based Treasury sold 6.18 billion euros of bonds, less than its maximum target of 6.5 billion euros. It auctioned 3.5 billion euros of five-year notes at an average yield of 5.32 percent, compared with 5.6 percent at the previous sale of the securities on Sept. 13. In eight offerings of the notes this year, the average yield was 4.17 percent, Bloomberg data show.

The government also sold debt due in 2018, 2021 and 2025.

Italy’s 10-year yields surged to a euro-era record 6.397 percent on Aug. 5 as contagion from the debt crisis that engulfed Greece, Ireland and Portugal spread to larger nations.

The extra yield investors receive for holding 10-year Italian bonds instead of Spanish securities widened to 66 basis points today, a euro-era record.

The ECB bought Italian government bonds after the auctions, according to three people with knowledge of the transactions. A spokeswoman for the central bank declined to comment when contacted by telephone.

ECB Buying

The ECB began purchasing bonds from Spain and Italy on Aug. 8 to curb the increase in yields, according to people with knowledge of the transactions. The central bank doesn’t disclose which bonds it is buying under the program.

BlackRock Inc., the world’s biggest money manager, is buying Italian debt given the improved prospects for a resolution to the euro-area debt crisis, Chief Investment Officer Rick Rieder said.

“The ultimate outcome we think is going to be constructive and that has sent a breath of fresh air into the marketplace,” Rieder, who helps oversee $3.66 trillion at New York-based BlackRock, said on Bloomberg Television’s “Inside Track” with Erik Schatzker. “It definitely feels better and there is a tone that has changed.”

Spanish 10-year bond yields rose nine basis points to 5.21 percent, and similar-maturity Belgian debt yields increased 11 basis points to 4.34 percent.

Growth Forecasts

Germany’s 10-year bonds snapped a six-day decline after the ECB said in its monthly bulletin that private-sector involvement in the euro-area bailouts through enforced losses would have “direct negative effects” on the banking sector.

Demand for safety of bunds also increased after Germany’s top economic institutes cut their 2012 forecast for growth due to the debt crisis. Growth will slow to 0.8 percent next year from 2.9 percent in 2011, according to the biannual independent report commissioned by the German government.

Bunds stayed higher even as Slovakia approved Europe’s enhanced bailout fund, completing ratification across the 17 euro countries.

The 10-year bund yields fell eight basis points to 2.11 percent, and the two-year rate also declined eight basis points to 0.63 percent. German bund futures rose, with the front month futures contract rising 0.6 percent to 134.31.

Greek bondholders will probably have to take losses deeper than the 21 percent foreseen in a debt swap that was part of a July 21 bailout agreement, a French official said today.

“The realization that, ultimately, nothing concrete has really been decided yet regarding the ‘big’ solution to the debt crisis appears to be the main driver behind the loss of risk appetite today,” John Davies, a fixed-income strategist at WestLB AG in London, wrote in a note to investors.

German bonds have handed investors a 1.7 percent loss this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds have declined 0.4 percent in October, and Greek debt has slumped 7.9 percent.

--Editors: Matthew Brown, Nicholas Reynolds

To contact the reporters on this story: Emma Charlton in London at; Paul Dobson in London at

To contact the editor responsible for this story: Daniel Tilles at

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