Italian and Spanish notes advanced this week, with yields dropping the most since September, as signs the global economy is recovering spurred demand for higher-yielding assets.
Italy’s two-year yields fell to the lowest in more than two years as U.S. lawmakers agreed a budget deal to avoid the so- called fiscal cliff and reports showed the American job market and German retail sales improved. German 10-year yields climbed to the highest in three months as investor appetite for safer assets waned. Economists predict the European Central Bank will keep its key rate at a record low next week to encourage growth.
“The removal of the fiscal-cliff uncertainty was positive for risky assets and that led to a rally in peripheral bonds,” including those from Italy and Spain, said Mohit Kumar, London- based head of European interest-rate strategy at Deutsche Bank AG, Germany’s biggest bank. “In Europe, expectations for economic data are so low that there is some room for some upside and Spanish and Italian data has been surprising.”
Italy’s two-year yield fell 32 basis points, or 0.32 percentage point, this week to 1.68 percent, the biggest decline since the period ending Sept. 7. The 6 percent note due November 2014 rose 0.53, or 5.30 euros per 1,000-euro ($1,305) face amount, to 107.835. The rate dropped to 1.62 percent yesterday, the lowest since October 2010.
The yield on similar-maturity Spanish notes declined 46 basis points this week to 2.43 percent.
A gauge of Italy’s service industries climbed to 45.6 in December from 44.6 the previous month, London-based Markit Economics said yesterday. An index of Spanish services rose to 44.3 from 42.4, a separate report from Markit showed. Readings below 50 indicate contraction.
The data “are clearly signs that activity has bottomed,” James Nixon, chief European economist at Societe Generale SA in London, wrote in a note to clients. “The pace of the recession is not getting any worse.”
German, Dutch and Austrian bonds all declined this week as the U.S. House of Representatives voted in favor of the Senate’s budget legislation. The 257-167 bipartisan vote on Jan. 1 ended a yearlong impasse over how to avert $600 billion in tax increases and spending cuts that were due to take effect at the start of the year.
German 10-year yields climbed 23 basis points over the week to 1.54 percent after rising to 1.56 percent yesterday, the highest since Oct. 26.
The ECB will leave its key interest rate at 0.75 percent on Jan. 10, according to the median estimate of 55 economists in a Bloomberg survey. Five predict the central bank will lower the benchmark to 0.5 percent.
Spain plans to sell debt maturing in March 2015, January 2018 and July 2026 on the same day.
German bonds returned 4.5 percent last year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italy’s debt gained 21 percent and Spain’s returned 6 percent.
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