Spanish and Italian bonds rallied as the two nations sold a combined 14 billion euros ($18.8 billion) of bills, allaying concern that political turmoil in both countries would damp demand for their debt.
Spain’s 10-year yields dropped the most in three weeks as Prime Minister Mariano Rajoy said the government significantly reduced its budget deficit last year. Italy’s 10-year yield fell the most in a month. German bunds declined as demand for safer assets waned. Spanish and Italian securities slid last week as opposition leaders called for Rajoy to step down over allegations of corruption and polls showed this month’s Italian election may result a hung parliament.
“The risky issues have dissipated a bit in Italy and Spain,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “Even if there’s an election result in Italy that’s not the best for markets, we don’t expect it to become a new source of crisis. If there are selloffs, probably there will be investors ready to jump in and buy these assets.”
Spain’s 10-year yield declined 10 basis points, or 0.1 percentage point, to 5.33 percent at 4:42 p.m. London time after dropping as much as 13 basis points, the most since Jan. 22. The 5.4 percent bond due in January 2023 climbed 0.75, or 7.50 euros per 1,000-euro face amount, to 100.555.
The Italian 10-year yield declined 12 basis points to 4.51 percent after falling as much as 14 basis points, the biggest drop since Jan. 10.
Spanish budget figures in coming weeks will show how close Rajoy’s five rounds of spending cuts and tax increases got the shortfall to a target set at 6.3 percent of output for 2012 by euro-area finance ministers in July.
“Public deficit data for 2012 to be published in the coming weeks will show unprecedented fiscal consolidation efforts have been made,” Rajoy told reporters in Madrid. The budget cuts are of “extraordinary merit” in times of recession have removed doubts about the sustainability of Spanish public finances, he said.
Spain sold 5.57 billion euros of six- and 12-month bills, exceeding the upper goal of 5.5 billion euros. The Treasury sold the six-month debt at an average yield of 0.859 percent, versus 0.888 percent on Jan. 22. The 12-month securities were auctioned at 1.548 percent, compared with 1.472 percent on Jan. 15.
Italy sold 365-day bills at 1.094 percent, up from 0.864 percent on Jan. 10. The Rome-based Treasury is scheduled to sell bonds maturing between 2015 and 2040 tomorrow.
Final polls taken last week before Italy’s Feb. 24-25 elections show former premier Silvio Berlusconi was narrowing the lead of front-runner Pier Luigi Bersani.
“Just before the elections, we’d look for a rebound” in Italian bonds, Societe Generale SA strategists Ciaran O’Hagan and Vincent Chaigneau in Paris wrote today in a note to clients. “Just about everybody has a pessimistic view of the outcome, investors are positioned for a poor result, and we still just might see a functioning reformist government.”
German two-year notes fell for a third day before the nation auctions 5 billion euros of the securities tomorrow.
The notes to be sold will carry a coupon of 0.25 percent, the first positive interest rate since April, the Bundesbank said in a statement today.
The German two-year yield climbed one basis point to 0.19 percent after falling to 0.16 percent on Feb. 8, the lowest level since Jan. 24. The 10-year yield rose three basis points to 1.64 percent.
The Netherlands sold 2.685 billion euros of notes maturing in 2018 at an average yield of 0.884 percent, versus a record- low 0.861 percent on Oct. 9. Dutch five-year securities rose four basis points to 0.79 percent.
Volatility on Italian bonds was the highest in euro-area markets today, followed by those of Finland and Spain, according to measures of 10-year or similar-maturity debt, the yield spread between two-year and 10-year securities, and credit- default swaps.
German bonds handed investors a loss of 1.4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt returned 1 percent and Italian securities were little changed.
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