Bloomberg News

Italian 10-Year Government Bonds Pare Decline After Sale

June 28, 2012

Spanish 10-year bond yields rose to 7 percent amid concern European Union leaders meeting for a two- day summit in Brussels starting today will fail to agree on a strategy to resolve the region’s debt crisis.

German bonds advanced for the first time in three days as investors sought safer assets and a report showed unemployment in Europe’s largest economy climbed in June. Italy’s borrowing costs increased as the nation sold five- and 10-year debt. Spanish bonds pared losses as the Wall Street Journal said Germany may be willing to issue joint euro-area bonds sooner than expected. Ten-year yields of 7 percent forced Greece, Ireland and Portugal to seek sovereign bailouts.

“The summit is likely to take steps to outline a long-term road map, but fail to deliver a quick fix to stabilize the financial markets,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “Italian and Spanish bond yields are likely to remain under pressure.”

The Spanish 10-year yield was little changed at 6.93 percent at 4:32 p.m. London time after climbing to 7.01 percent, the highest since June 20. The yield rose to a euro-era record of 7.29 percent on June 18. The 5.85 percent bond due in January 2022 dropped 0.015, or 15 euro cents per 1,000-euro ($1,244) face amount, to 92.585.

German Chancellor Angela Merkel, who has rejected calls to do more to bring down Spanish and Italian borrowing costs, appears isolated before the summit as French President Francois Hollande, Italian Prime Minister Mario Monti and Spanish Premier Mariano Rajoy have all called for greater urgency.

‘Rapid Solutions’

“I’ve come for very rapid solutions to support countries in difficulty on the markets,” Hollande told reporters in Brussels. Without specifying Spain or Italy, he said they “have made considerable efforts to deal with their public accounts.”

Spanish bonds trimmed declines after German Finance Minister Wolfgang Schaeuble was quoted by the Journal as saying the nation is “willing to go as far as we need in order to get a sustainable agreement in Europe.” The Finance Ministry in Berlin denied he had signaled faster joint bond issuance.

German bunds rallied as the Federal Labor Agency said the number of people out of work rose a seasonally adjusted 7,000 to 2.88 million. Economists forecast an increase of 3,000, according to a Bloomberg News survey.

Bunds also advanced as a separate report showed economic confidence in the euro area slumped in June. The index of executive and consumer sentiment dropped to 89.9 from a revised 90.5 in May, the European Commission said.

‘Spillover Effects’

“The confidence indicators confirm that the economy is not in a good shape,” said Annalisa Piazza, a fixed-income analyst at Newedge Group in London. “Spillover effects of the debt crisis have started to affect also the more resilient economies like Germany.”

The 10-year bund yield declined six basis points to 1.51 percent, approaching the record low 1.127 percent set on June 1. The two-year yield dropped two basis points to 0.11 percent.

Italy’s 10-year yield reached a two-week high as the nation sold 5.42 billion euros of five- and 10-year securities, less than its Rome-based Treasury priced the 10-year debt to yield 6.19 percent, up from 6.03 percent at the previous auction on May 30. The five-year note was sold at a yield of 5.84 percent, versus 5.66 percent last month.

‘Elevated Yields’

“They got it away but at elevated yields,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “You couldn’t have all of your debt being financed at this rate. Italy is in a reasonable situation from a budget perspective and they can deal with it for a while, but it’s not something that can go on forever.”

Italy’s 10-year yield was little changed at 6.19 percent after rising to 6.28 percent, the highest since June 14. The two-year yield dropped 27 basis points to 4.33 percent.

Italian bonds handed investors a loss of 4.8 percent this quarter, while Spanish debt fell 7.6 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds returned 1.9 percent.

Volatility on Italian government debt was the highest in euro-area markets today followed by Germany and Finland, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit-default swaps.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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


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