Bloomberg News

Italian Bonds Drop for Third Week as Boost From ECB Loans Wanes

March 31, 2012

Italian bonds fell for a third week as the nation missed its target at a debt auction and the boost to demand for the securities from European Central Bank liquidity measures waned.

Italy auctioned 8 billion euros ($10.6 billion) of bonds and floating-rate securities on March 29, missing its 8.25 billion-euro maximum target for the sale. Spain’s bonds rose for the first time in four weeks before it sells debt on April 4. The ECB has lent more than 1 trillion euros to European financial institutions through its longer-term refinancing operations.

“The liquidity effect of the LTRO is gradually losing momentum,” said Michael Leister, a fixed-income strategist at DZ Bank AG in Frankfurt. “This explains the increasing effect supply is having on the respective markets; this week Italy, and we’re probably going to see the same thing next week in Spain.”

Italy’s 10-year bond yields rose eight basis points in the week to 5.12 percent at 4:37 p.m. London time yesterday. The 5 percent security due March 2022 changed hands at 99.570 percent of face value. The nation’s two-year note yield gained 40 basis points to 2.89 percent.

The two-year Italian yield has surged about 120 basis points from its 2012 low even as Prime Minister Mario Monti tries to cut spending and raise taxes. This month his government overhauled labor laws to make it easier to fire workers, sparking a general strike by the nation’s main union.

Spanish Budget

Spanish 10-year yields advanced three basis points to 5.34 percent as it prepares to auction bonds due 2015 through 2020 next week. The nation’s cabinet yesterday passed its 2012 budget, promising to reduce the deficit gap to 5.3 percent of gross domestic product from 8.5 percent in 2011, the largest reduction in at least three decades.

The yield on 10-year German bunds, Europe’s benchmark securities, fell seven basis points to 1.79 percent amid concern an extension of the region’s anti-crisis firewall will not be sufficient to prevent further debt-market turmoil. Euro-area finance ministers meeting in Copenhagen yesterday increased the overall size of relief funds to 800 billion euros.

“The headline on the firewall is a repeating theme that politicians think they come out with a number that will shock and awe the markets, but the market is unlikely to be very impressed,” said Leister. “It will provide sufficient support for bunds, where yields remain biased to the downside.”

Germany plans to offer as much as 8 billion euros of six- month and five-year government securities next week. France, Belgium, the Netherlands and Portugal are also scheduled to sell debt.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net.

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


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