Bloomberg News

Italy Notes Fall Most in Six Weeks After Sale; German Bunds Gain

October 28, 2011

Oct. 28 (Bloomberg) -- Italian bonds slumped, pushing two- year yields up the most in six weeks, as an increase in borrowing costs at a debt sale spurred concern European Union leaders haven’t done enough to stem the debt crisis.

Spanish and French bonds also declined as Italy raised 7.93 billion euros ($11.2 billion) from the auction, less than its maximum target of 8.5 billion euros. Italian 10-year yields climbed above 6 percent for the first time this week even as people said the European Central Bank bought the securities. German bunds rose as stocks fell and the euro weakened against the dollar and the yen, spurring demand for safer assets.

“The summit has not provided us with a solution for Italy,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. The region’s rescue fund would still be “too small to cover Italy’s potential funding needs if it were unable to fund itself in the bond market,” he said.

Italy’s two-year yields rose 30 basis points, or 0.3 percentage point, to 4.73 percent at 4:23 p.m. London time, after rising as much as 31 basis points, the most since Sept. 12. The 4.5 percent note due September 2013 fell 0.485, or 4.85 euros per 1,000-euro face amount, to 99.295.

The Italian 10-year-yield climbed 15 basis points to 6.02 percent, the first time it has risen above 6 percent since Oct. 21. Spain’s 10-year rate gained 17 basis points to 5.50 percent, and similar-maturity French yields rose five basis points to 3.17 percent.

Test of Demand

Italy’s debt sale was the first test of investor demand since EU leaders ended an all-night summit in Brussels yesterday with an agreement to boost the euro-area rescue fund, recapitalize banks and apply a 50 percent reduction in how much Greece will repay its bondholders.

The Rome-based Treasury sold 3.08 billion euros of 2014 bonds at a yield of 4.93 percent, up from 4.68 percent at the previous auction on Sept. 29. It also issued bonds maturing in 2017, 2019 and 2022.

While Italy “sold the bulk of what they wanted to sell,” the rates it had to pay was “very high,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London.

The German two-year yield fell three basis points to 0.63 percent after rising to 0.72 percent, the highest since Oct. 13. The 10-year rate dropped one basis point to 2.20 percent.

‘Crisis of Confidence’

The crisis won’t be over in a year, German Chancellor Angela Merkel said today, while urging Greece to hold to its program of budget austerity. The euro area faces “a crisis of confidence” that risks turning away investors, Merkel said in a speech to members of her Christian Democratic Union party in the German town of Deggendorf. “We’re not going to get rid of that in a day, with one big bang, or in a year.”

The Stoxx Europe 600 Index of shares dropped 0.2 percent after gaining as much as 0.8 percent. The euro weakened 0.2 percent to $1.4171.

“We all recognize there have been some very good steps that have been taken in terms of giving confidence to the market that’s been sorely lacking, but how far that goes, we really don’t know,” said Nicholas Moore, chief executive officer of Sydney-based Macquarie Group Ltd., Australia’s biggest investment bank.

The Frankfurt-based ECB bought Italian and Spanish securities today, according to the two people who declined to be identified because the trades are confidential. An ECB spokesman declined to comment when contacted today by phone.

The extra yield investors demand to hold Italy’s 10-year bond instead of German bunds widened to 382 basis points from 367 basis points yesterday. The ECB started buying Italian debt on Aug. 8 to contain borrowing costs after the 10-year yield surged to a euro-era high of 6.40 percent.

Italian debt has lost 5 percent since June 30, according to indexes developed by Bank of America Merrill Lynch. German bonds have returned 6.3 percent as investors sought out the securities of Europe’s largest economy as a haven.

--With assistance from Lorenzo Totaro in Rome, Tony Czuczka in Berlin and Keith Jenkins in London. Editors: Matthew Brown, Nicholas Reynolds

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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