Bloomberg News

Italian Bonds Post Worst Year Since 1992; Spanish Debt Gains

December 30, 2011

Dec. 30 (Bloomberg) -- Italian 10-year bond yields stayed at more than 7 percent for a second day, with the debt completing its worst year since at least 1992 as fallout from Europe’s debt crisis infected the region’s larger economies.

Italian bonds handed investors a 5.7 percent loss this year, according to indexes compiled by Bloomberg and European Federation of Financial Analysts Societies. They’ve slid even as the European Central Bank was said to have bought bought the debt and Mario Monti replaced Silvio Berlusconi as Prime Minister. German bonds had their best year since 2008 as investors sought a refuge from the crisis.

“The market lost confidence, particularly in Berlusconi and his ability to drive forward measures” to counter the debt crisis, said Eric Wand, a fixed-income strategist at Lloyds TSB Bank Plc in London. “Now Monti is in place without any political strings attached, it all depends on delivery. It’s a case of convincing the market that things are sustainable.”

The Italian 10-year bond yield was little changed at 7.01 percent at 3:24 p.m. London time. It’s up from 4.82 percent on Dec. 31, 2010. The 5 percent securities maturing in March 2022 traded at 86.32 percent of face value. French and Belgian bonds dropped.

The euro weakened for a sixth day against the Japanese currency, falling below 100 yen for the first time since 2001, and U.K. government bond yields fell to record lows, amid mounting concern that austerity measures to counter Europe’s debt crisis will slow growth.

European Manufacturing

Data next week may confirm European manufacturing contracted for a fifth straight month.

With an economy sinking into its fourth recession since 2001, Monti’s government plans to raise almost half a trillion euros ($649 billion) from bond and bill sales next year. At a year-end press conference in Rome yesterday, Monti said he was preparing measures aimed at cushioning the economic slump, including deregulating labor markets and lowering fuel prices.

Borrowing costs fell at auctions of almost 20 billion euros of Italian securities this week even as less than the maximum target amount of bonds were sold. The ECB was seen buying up debt to buoy the market for the bonds, helping the world’s fourth-biggest borrower tap markets.

Spanish securities rose as Prime Minister Mariano Rajoy said his government will cut spending by 8.9 billion euros in the first quarter and raise taxes, the first steps in a plan to slash a budget deficit that will breach the target for this year.

Rajoy’s Mission

Rajoy is trying to convince investors he can avoid following Greece, Ireland and Portugal in needing a bailout while reviving an economy hampered by Europe’s highest jobless rate at 23 percent. The nation’s 10-year bond yield dropped eight basis points to 5.09 percent, having started the year at 5.45 percent and risen as high as 6.78 percent.

Volatility on Spain’s debt was the second-highest among 24 nations tracked by Bloomberg, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. Belgium’s securities were the most volatile.

The 10-year bund yield fell three basis points to 1.82 percent. The rate has tumbled more than a percentage point from 2.96 percent on Dec. 31. Two-year note yields were also little changed, at 0.15 percent, after reaching a record-low 0.142 percent yesterday. Dutch two-year note yields fell today to a record 0.153 percent as investors sought the region’s safest government debt securities.

French President Nicolas Sarkozy is set to travel to Berlin on Jan. 9 to resume talks with German Chancellor Angela Merkel on ending the euro-region debt crisis, an official familiar with the matter said yesterday.

French Sale

French 10-year yields rose five basis points to 3.14 percent. France will sell bonds maturing between 2021 and 2041 on Jan. 5, the nation’s debt agency said today.

Rates on similar-maturity Belgian debt increased two basis points to 4.07 percent.

Lawmakers from Merkel’s Christian Social Union political bloc are demanding conditions for agreeing to speed up the addition of funds to the European Stability Mechanism bailout facility, Financial Times Deutschland reported, citing Gerda Hasselfeldt from the Bavarian CSU.

The group is prepared to agree to a faster increase if other countries beside Germany also ramp up payments to the fund, the newspaper cited Hasselfeldt as saying.

Finance Minister Wolfgang Schaeuble ruled out a euro-area breakup in an interview with Handelsblatt.

German securities, Europe’s benchmark government debt, have handed investors a 9.6 percent profit this year, the most since 2008, according to the Bloomberg/EFFAS indexes. The worst performers were Greece, Portugal and Italy, as the sovereign- debt crisis triggered sales of the nations’ government bonds.

--With assistance from Cornelius Rahn in Frankfurt. 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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