Bloomberg News

Italian Notes Rise as ECB Is Seen Buying Debt; German Bunds Gain

December 29, 2011

Dec. 29 (Bloomberg) -- Italian two-year notes rose for a fourth day as the European Central Bank was said to have bought the nation’s debt as part of its efforts to stem the spread of the region’s financial crisis.

Ten-year bonds fell, increasing the additional yield investors demand to hold the securities instead of benchmark German bunds, after the nation raised less than its maximum target at an auction of debt due between 2014 and 2022. French securities declined and the euro weakened to a 15-month low against the dollar. German bunds rose for a third day as a report showed inflation slowed in December.

“In this period the market is very thin, and the ECB can easily lift the prices up,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam.

Italy’s two-year yield fell five basis points, or 0.05 percentage point, to 4.96 percent at 4:26 p.m. London time. The 2.25 percent note due November 2013 rose 0.08, or 80 euro cents per 1,000-euro ($1,291) face amount, to 95.42.

The 10-year yield was two basis points higher at 7.02 percent, after climbing as high as 7.13 percent. The difference in yield, or spread, with similar-maturity German bonds widened seven basis points to 518 basis points.

The ECB bought Italian debt today, according to two people with knowledge of the trades who declined to be identified because the deals are confidential. A spokesman for the ECB in Frankfurt declined to comment.

Annual Loss

Italian bonds have handed investors a loss of 5.8 percent in 2011, set for the worst year since the European Federation of Financial Analysts Societies and Bloomberg started compiling data on the securities in 1992.

At a year-end press conference in Rome today, Prime Minister Mario Monti said Italy’s borrowing costs -- more than triple Germany’s for 10 years -- were unjustified.

Longer-maturity Italian bonds fell after the government sold 7.02 billion euros of debt, less than its maximum target of 8.5 billion euros. The Treasury agreed to pay a yield of 6.98 percent on securities maturing in 2022, close to the 7 percent level that prompted euro-area peers to seek bailouts.

“Yield levels around 7 percent are absolutely not sustainable,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich. “They could not sell the entire size they planned. It’s not positive news for the stressed sovereign-debt markets in the euro zone.”

Italy also auctioned 2.5 billion euros of notes due in 2014, versus the maximum of 3 billion euros, and investors bid for 1.36 times the amount of securities sold, from 1.5 times last month. The yield fell to 5.62 percent, from 7.89 percent at the previous sale on Nov. 29.

‘Disappointment’

“Bid-cover ratios were low, but with this being year-end that is to be expected,” Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London, wrote in a note to clients. “The disappointment will mainly be that the demand for the three-year failed to show any improvement above the norm,” even after the ECB provided 489 billion euros of three-year loans to financial institutions last week, he said.

French 10-year yields climbed seven basis points to 3.08 percent, and the rate on similar-maturity Portuguese securities increased 17 basis points to 13.53 percent.

Volatility on France’s debt was the third-highest among 24 nations tracked by Bloomberg, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

The euro fell as much as 0.6 percent to $1.2858, the weakest level since Sept. 14, 2010. The currency dropped to a 10-year low of 100.06 yen.

German Bonds

German two-year yields fell one basis point to 0.16 percent after matching yesterday’s low of 0.142 percent, the least since Bloomberg began collecting the data in 1990. The 10-year yield dropped five basis points to 1.85 percent, after touching 1.83 percent, the lowest since Nov. 18.

The German inflation rate, calculated using a harmonized European Union method, declined to 2.4 percent from 2.8 percent in November, the Federal Statistics Office said. Slower inflation helps preserve the purchasing power of the fixed income from bonds.

German bonds have returned 9.4 percent this year, according to the Bloomberg/EFFAS indexes.

--Editors: Mark McCord, Nicholas Reynolds

To contact the reporter on this story: 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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