Bloomberg News

Italian Bonds Rise on Debt Sale as Greece Prepares for Debt Swap

February 24, 2012

Feb. 24 (Bloomberg) -- Italian bonds advanced, with 10-year debt heading for a seventh week of gains, after the nation raised its maximum amount at an auction of zero-coupon notes.

Spanish bonds gained for the seventh day before the European Central Bank offers regional banks a second round of three-year loans next week as it seeks to contain the sovereign debt crisis. Greek Prime Minister Lucas Papademos said the nation will issue a formal offer to investors to exchange their holdings of government debt for new securities today.

“It was a very strong zero-coupon auction,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. The results are “indicative of continued demand for shorter-maturity Italian paper over the past couple of months.”

The Italian 10-year bond yield fell seven basis points, or 0.07 percentage point, to 5.48 percent at 4:24 p.m. London time, extending this week’s decline to 10 basis points. The 5 percent bond due March 2022 rose 0.475, or 4.75 euros per 1,000-euro ($1,346) face amount, to 96.895. Two-year yields dropped 10 basis points to 2.82 percent.

Italy sold 3 billion euros of two-year, zero-coupon notes at an average yield of 3.013 percent, down from 3.763 percent at the previous offering on Jan. 26.

Spanish Bonds

The nation also auctioned 1.5 billion euros of inflation- linked debt. The five-year break-even rate, derived from the difference in yield between conventional and index-linked bonds, widened as much as 41 basis points, to 1.59 percentage points, the most since Aug. 3, and was last at 1.37 points.

Spanish bonds headed for a second weekly gain before the ECB offers the second of its so-called longer-term refinancing operations on Feb. 28.

European financial institutions may ask for 470 billion euros of loans, compared to 489 billion euros in the previous offering in December, according to the median of 28 estimates in a Bloomberg News survey.

“The LTRO is the big event and overshadows the rest of the landscape,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “The overall market sentiment is still positive.”

The Spanish 10-year yield fell three basis points to 5.05 percent, having dropped 21 basis points this week. The two-year notes declined 10 basis points to 2.6 percent.

Greek Debt Swap

Greece will today make a formal offer to holders of its debt to take part in a swap for new securities, a government official told reporters in Athens.

A bank recapitalization provision will be submitted to Parliament tomorrow and attached to a bill on prior actions which is required for a second bailout package from the European Union and International Monetary Fund, according to the official who declined to be named.

The bond exchange may occur on March 12 for those securities currently governed by Greek law while bonds covered under foreign laws will be exchanged in early April.

Investors will forgive 53.5 percent of their principal and exchange their remaining holdings for new Greek government bonds and notes from the European Financial Stability Facility. Barclays Plc estimates the package to be worth around 26.6 percent of the bonds’ original value, according to an e-mailed note to clients by Cagdas Aksu, a European rates strategist.

Greek notes maturing next month traded at 27.175 percent of face value, from 37.54 on Feb. 17.

German GDP

German 10-year bund yields were within a basis point of the lowest in a week after a government report confirmed Europe’s biggest economy shrank last quarter.

The Federal Statistics Office in Wiesbaden said gross domestic product fell 0.2 percent from the third quarter. Exports dropped 0.8 percent, the office said.

The German 10-year yield was little changed at 1.88 percent after falling to 1.875 percent yesterday, the lowest level since Feb. 16.

The extra yield investors demand to hold two-year Italian notes instead of similar-maturity German debt shrunk to 2.58 percentage points from 4.92 percentage points on Dec. 22, the day after the ECB’s previous funding operation was allotted.

Buying Opportunity

Cathay Life Insurance Co. said it plans to buy Italian and Spanish debt, taking advantage of Italian yields five times higher than those in Taiwan.

“The sell-offs in Europe give us opportunities to buy,” said Allen Lee, who helps oversees about $95 billion as deputy manager at Taiwan’s biggest life insurer in Taipei. Italian and Spanish “yields are attractive, especially if the contagion risks of Greek problems are declining,” he said

Italian 10-year yields have fallen more than 2 percentage points since climbing to a euro-era record high of 7.48 percent in November.

Italy’s bonds have returned 9 percent this year, the second best among 26 sovereign indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies without adjusting for currency movements. Ireland’s bonds have the greatest returns, at 10 percent.

The European Union is planning to sell 20-year bonds in euros, according to a banker involved in the transaction. The proceeds will be used for the aid package to Ireland. Citigroup Inc., Deutsche Bank AG, DZ Bank AG, Royal Bank of Scotland Group Plc and UBS AG are managing the sale, the banker said.

--With assistance from Hannah Benjamin in London. Editors: Paul Dobson, Nicholas Reynolds

To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.


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