Bloomberg News

Spanish, Italian, French Bonds Decrease on Debt Turmoil, Supply

October 24, 2011

Oct. 24 (Bloomberg) -- Spanish, Italian and French government bonds fell as Europe’s leaders struggled to convince investors that they can craft an effective response to the region’s sovereign debt crisis.

The securities also declined on additional supply this week. France sold 7 billion euros ($9.8 billion) of bills, while Italy is planning to offer up to 11.25 billion euros of securities between Oct. 26 and Oct. 28, and Spain is due to auction three- and six-month bills tomorrow. German two-year notes were little changed.

“The main disappointment was that there was no agreement on increasing the size” of the European bailout fund, said Alessandro Giansanti, a senior interest-rates strategist at ING Groep NV in Amsterdam. “Spreads will continue to widen ahead of the upcoming supply from Italy.”

Italy’s 10-year yield rose six basis points, or 0.06 percentage point, to 5.94 percent. The 4.75 percent security maturing in September 2021 lost 0.390, or 3.90 euros per 1,000-euro face amount, to 91.82. Yields on similar-maturity Spanish securities increased six basis points to 5.94 percent, while 10-year French government note yields rose seven basis points to 3.32 percent.

The difference between Italian and German 10-year yields widened four basis points to 383 basis points, after reaching 400 last week for the first time since Sept. 22. The spread between Spanish debt and bunds expanded six basis points to 342. The gap between French and German yields widened 6 basis points to 120 basis points, the most since 1992.

‘Difficult Process’

Europe’s leaders excluded a forced restructuring of Greek debt, sticking with the tactic of encouraging bondholders to accept losses to help restore the country’s finances. Greece’s deteriorating outlook has narrowed Europe’s room for maneuver in battling the contagion, which threatens to send the country into default, roil the banking system, infect Spain and Italy and tip the world economy into recession.

“The politicians are finally doing something, but it’s not as comprehensive a package as the market was expecting,” said Morten Hassing Povlsen, senior rates analyst at Nordea Bank AB in Copenhagen. “We’re back to kicking the can down the road. They’re trying to stop the bleeding, but it’s a bit of a disappointment. The market will stick to risk-off trades.”

Europe’s leaders are scheduled to meet again on Oct. 26 to try to finalize a plan to resolve the debt crisis, following their meeting in Brussels over the weekend.

“It’s going to be a long, very difficult process with an awful lot of implementation risk,” Andrew Balls, head of European portfolio management at Pacific Investment Management Co., said in an interview with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

Growth Slows

German bonds rose earlier after a report showed Europe’s services and manufacturing industries contracted, adding to concern the debt crisis is damaging the economic recovery.

A composite index based on a survey of European purchasing managers in manufacturing and services fell to 47.2 in October, from 49.1 in the previous month, London-based Markit Economics said today. The index fell below 50, indicating contraction, in September for the first time since July 2009.

Two-year German yields were little changed at 0.66 percent after earlier dropping as much as seven basis points. The 10-year climbed two basis points to 2.12 percent.

Germany’s bunds have returned 6.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. France’s debt has risen 2.3 percent, while Italian bonds lost 4 percent, even as people said the European Central Bank bought the securities.

ECB Purchases

The ECB said today it settled 4.5 billion euros of bond purchases in the week ended Oct. 21, versus 2.2 billion euros the previous week. The central bank will take seven-day term deposits from banks tomorrow to absorb the 169.5 billion euros of liquidity created since the program started May 10, 2010, a practice it uses to ensure the purchases don’t fuel inflation.

The Frankfurt-based central bank started buying Italian and Spanish government bonds in August, leading to a split between policy makers, with Juergen Stark saying on Sept. 9 he would resign from the ECB’s Executive Board. Council member Jens Weidmann said last month the bank should reduce the risks on its balance sheet rather than increase them.

Volatility on French sovereign debt was the highest in euro-area markets today, followed by Belgium’s, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. Belgium’s 10-year yield rose four basis points to 4.46 percent.

--With assistance from Daniel Kruger in New York. Editors: Nicholas Reynolds, Dennis Fitzgerald

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at; Garth Theunissen in London at

To contact the editor responsible for this story: Dave Liedtka at

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