Bloomberg News

Italian Bonds Decline Before Debt Auctions; German Bunds Gain

December 27, 2012

Italy’s government bonds declined, pushing the 10-year yield to the highest level in a week, before the nation sells as much as 3 billion euros ($3.98 billion) of the securities tomorrow.

Italian five-year debt dropped as the Rome-based Treasury also prepared to sell up to 3 billion euros of notes maturing in 2017 tomorrow. German 10-year bunds climbed for a third day, pushing the yield to a two-week low, amid concern U.S. lawmakers won’t reach an agreement on budget negotiations in time to stop more than $600 billion in tax increases and spending cuts for 2013 starting to take effect in January. Euro-region government bond markets were closed from Dec. 24 through Dec. 26.

Italian bonds “have been down all session because the market is cheapening up to accommodate tomorrow’s supply,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London.

Italy’s 10-year yield rose six basis points, or 0.06 percentage point, to 4.53 percent at 4:45 p.m. London time, the highest level since Dec. 18. The 5.5 percent bond maturing in November 2022 fell 0.46, or 4.60 euros per 1,000-euro face amount, to 108.05.

The yield on the nation’s five-year notes climbed seven basis points to 3.25 percent.

Italian Auctions

The Italian Treasury last sold 10-year bonds on Nov. 29 at an average yield of 4.45 percent. It auctioned five-year notes at 3.23 percent the same day.

Italy allotted 8.5 billion euros of six-month bills at an average yield of 0.949 percent today, up from 0.919 percent at a previous auction on Nov. 28. It also sold 3.25 billion euros of zero-coupon notes due in 2014 at an average yield of 1.884 percent, compared with a rate of 1.92 percent at a previous sale on Nov. 27.

Germany’s 10-year bund yields dropped as much as six basis points to 1.32 percent, the lowest level since Dec. 13, as investors sought the security of Europe’s benchmark debt amid concern about the so-called fiscal cliff.

U.S. Senate Majority Leader Harry Reid said today a resolution to the budget dispute before Jan. 1 appears unlikely because Republicans won’t cooperate.

France’s 10-year bond yields were little changed at 1.98 percent as data showed a gauge of French consumer sentiment unexpectedly improved in December and business confidence in Italy rose this month.

Economic Data

An index of household sentiment rose to 86 from 84 in November, the first increase since May, the Paris-based national statistics office Insee said. The median estimate in a Bloomberg News survey called for an unchanged reading of 84. A gauge of Italian business confidence climbed to 88.9 from 88.5 last month, according to Rome-based Istat.

Italian bond yields near two-year lows show investors are confident the rally that started after Mario Monti’s appointment as Prime Minister will survive an election next year.

Monti ruled out running in the Feb. 24-25 vote at a Dec. 23 press conference, while saying he would “consider” being the prime-ministerial candidate for a party that adheres to his economic agenda. His comments came weeks after former Prime Minister Silvio Berlusconi reversed a decision to stay out of the race.

Italy’s 10-year yield fell to 4.35 percent on Dec. 19, the least since December 2010. The rate has fallen from about 7 percent on Nov. 16 of last year, when Monti was sworn in to lead a government of non-politicians.

“So far the impact of recent political developments on the Italian government debt market has been muted,” Barclays Plc analysts Fabio Fois and Giuseppe Maraffino wrote in a client note on Dec. 24. “Demand from investors has been solid across maturities and broad based among investor classes. The current positive momentum for the Italian paper should continue.”

German bonds returned 4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italy’s bonds earned 21 percent.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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