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Italian notes had the biggest two- day drop in seven months, and Spanish securities slid, after borrowing costs rose at debt sales.
Spain’s bonds led losses in the euro area after Moody’s Investors Service downgraded 28 Spanish banks and Bundesbank President Jens Weidmann said there can be no pooling of issuance in Europe until governments agree to give up their fiscal sovereignty. German bunds slipped before European Union leaders meet in two days about the crisis. The European Central Bank said Cypriot bonds have become ineligible as collateral in refinancing operations.
“Demand is subdued, even for shorter-dated paper,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. The EU summit will probably be “a bit disappointing and for that reason we’d expect lower bund yields,” he said.
The yield on Italian two-year notes climbed 35 basis points, or 0.35 percentage point, to 4.68 percent at 4:41 p.m. London time. The 88 basis-point increase in yields in the past two days is the biggest jump since Nov. 9. The 3 percent security due April 2014 tumbled 0.57, or 5.70 euros per 1,000- euro ($1,247) face amount, to 97.28.
Similar-maturity Spanish yields were 36 basis points higher at 5.21 percent, adding to yesterday’s 42-basis point increase.
Italy sold 2.99 billion euros of zero-coupon 2014 debt to yield 4.71 percent, up from 4.04 percent at the previous auction on May 28. The nation is due to offer 9 billion euros of bills tomorrow and as much as 5.5 billion euros of 2017 and 2022 securities the day after. The government said today it would sell at least 30 billion euros of new bonds in the third quarter.
Spain auctioned three-month debt at an average yield of 2.36 percent, compared with 0.85 percent at the last auction in May, and six-month bills at 3.24 percent, versus 1.74 percent last month.
Volatility on Italian bonds was the highest in developed markets today followed by Spain, according to measures of 10- year debt, the spread between two- and 10-year securities and credit-default swaps.
German 10-year yields rose three basis points to 1.50 percent, after falling yesterday to 1.46 percent, the least since June 19. The Federal Finance Agency raised its debt sales target for the third quarter today, saying the nation plans to sell 71 billion euros of securities in the period, a 4.4 percent increase from December.
A 10-year road map, released today by four officials led by EU President Herman Van Rompuy, centered on common banking supervision and deposit insurance and a “criteria-based and phased” move toward joint debt issuance. German Deputy Foreign Minister Michael Link told reporters in Luxembourg that “parts of it read like a wish list.”
The Financial Times reported that the EU would have the right to revise the budgets of euro-area countries that contravene fiscal rules under proposals set to be considered at this week’s summit.
“Although there is nothing concrete at this point, people in the market judged the report as a step in the right direction,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “But I don’t think German yields will rise much further from here as the market is not overly optimistic ahead of the summit.”
Austrian, Dutch and Finnish securities fell as the nations sold government bonds.
The Dutch 10-year yield climbed five basis points to 2.04 percent, after falling 10 basis points yesterday. The Netherlands sold 2.17 billion euros of 10-year debt at an average yield of 1.995 percent, compared with 2.139 percent at the previous sale on May 8.
Finland began selling its first 30-year bond to tap investor demand for longer-dated securities.
The sale will be for 1.5 billion euros and priced to yield 45 basis points more than the mid-swap rate, said a person familiar with the sale, who asked not to be identified because the terms aren’t set.
Austria said it plans to sell bonds due in 2019 and 2044 through banks. The seven-year security will be priced to yield 42 basis points more than the mid-swap rate while the 32-year debt will yield 100 basis points more than swaps.
The mid-swap rate is a measure of the cost of exchanging variable- and fixed-interest rate payments and is used as a benchmark for European borrowing.
German bonds handed investors a 0.68 percent return this year on a risk-adjusted basis, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, taking into account volatility. That compares with a 0.51 percent gain from U.S. Treasuries and a 0.43 percent advance in U.K. gilts. Finnish bonds returned 1.05 percent on the same basis.
On an absolute basis, German debt earned 2.9 percent in 2012, with Portugal returning 31 percent, the most among 26 indexes tracked.
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