Bloomberg News

Italian Bonds Gain on Bets Leaders Will Boost Growth; Bunds Fall

May 22, 2012

Italy’s 10-year bonds advanced for a fifth day, the longest winning streak in two months, on speculation European leaders will announce additional steps to boost the region’s economy at a summit this week.

Spanish securities also gained, with 10-year yields dropping the most since January, after German Finance Minister Wolfgang Schaeuble said yesterday his country will consider all ideas to bolster growth at the meeting in Brussels tomorrow. German bunds fell as optimism the debt crisis will be contained sapped demand for 10-year yields within six basis points of a record low. Germany is scheduled to sell two-year notes tomorrow with a record-low coupon of zero percent, the Bundesbank said.

“There’s a vague idea we might get a policy response on a broader European Union level,” said Michael Leister, a rates strategist at DZ Bank AG in Frankfurt. “Investors realize that a great deal of Armageddon-scenario is already priced in. There’s a bit of profit-taking in bunds, given the record yield levels we’ve reached.”

Italy’s 10-year bond yield fell 19 basis points, or 0.19 percentage point, to 5.60 percent at 4:10 p.m. London time after dropping to 5.59 percent, the lowest since May 14. The 5 percent security due in March 2022 rose 1.23, or 1.23 euros per 1,000- euro ($1,277) face amount, to 95.965. The five-day advance is the longest since the period ended March 2.

Spain’s 10-year yield declined 18 basis points to 6.09 percent. It earlier fell as much as 20 basis points, the biggest intraday drop since Jan. 27.

Jumpstart Growth

German Chancellor Angela Merkel and French President Francois Hollande are seeking to balance France’s desire to jumpstart growth with Germany’s preference for spending cuts as a way of resolving the sovereign debt crisis.

“Everything will be on the table,” Hollande told reporters yesterday. “All the tools, all the proposals will be welcomed and I am not preparing this informal summit with my government to create conflict.”

Germany’s 10-year yield climbed five basis points to 1.48 percent, after falling to an all-time low 1.396 percent on May 18. The two-year yield increased two basis points to 0.06 percent. It dropped to a record 0.031 percent on May 18.

Germany will auction 5 billion euros of notes maturing in June 2014 tomorrow with a coupon of zero percent, the central bank said. At the previous offering of two-year securities on April 18, they were sold at a record-low average auction yield of 0.14 percent.

‘Lot of Demand’

“It’s uncertain whether the zero coupon causes any technical issues,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “In core markets, there has been a lot of demand for low-coupon paper relative to higher-coupon paper. Whether this extends to zero-coupon paper is unclear.”

Spanish borrowing costs rose as the nation sold three- and six-month bills. It auctioned 1.51 billion euros of three-month securities at an average yield of 0.846 percent, up from 0.634 percent on April 24. Investors bid for 3.95 times the amount of debt allotted, down from a so-called bid-to-cover ratio of 7.61.

The country also sold 1 billion euros of six-month bills at 1.737 percent, versus 1.58 percent on April 24.

The Netherlands auctioned 3 billion euros of notes maturing in April 2015 at an average yield of 0.456 percent, versus 0.618 percent at a previous sale on March 13.

Switzerland sold 733 million francs ($780 million) of six month-bills at a yield of minus 0.318 percent, versus minus 0.251 percent on April 10.

Austrian Bonds

Austria’s bonds gained, with 10-year yields falling four basis points to 2.47 percent after reaching 2.462 percent, the lowest level since Bloomberg began compiling data on the securities in 1993.

Volatility on Spanish government bonds was the highest in euro-area markets today followed by Ireland and France, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

German debt has returned 3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds dropped 3.5 percent, and Italian securities gained 8.3 percent.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@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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