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Italian Bonds Rise on ECB Debt Purchases; French Spread Widens

Thursday, 10 Nov 2011 12:45 PM

 

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Nov. 10 (Bloomberg) -- Italian government bonds rose as the European Central Bank was said to purchase the securities and after the nation sold the maximum amount of one-year bills on offer at an auction.

The advance pushed yields on Italian debt lower after they reached euro-era records yesterday. Italy’s senate is set to vote tomorrow on a package of austerity measures to clear the way for a new government. Yields on five- and 10-year securities stayed near 7 percent amid a clash between Germany and France over Europe’s permanent rescue fund and ECB comments that its intervention in the market is temporary. France’s yield premium over German bonds reached a euro-era record.

“The auction results should be interpreted within the context of the extreme pressure that has been brought to bear on Italian debt,” said Luca Jellinek, head of European interest- rate strategy at Credit Agricole Corporate & Investment Bank in London. “Together with reported ECB buying, this auction result should support further Italy outperformance.”

The yield on two-year Italian government notes slid 80 basis points, or 0.8 percentage point, to 6.40 percent at 4:50 p.m. London time. The 2.25 percent securities due November 2013 rose 1.34, or 13.40 euros per 1,000-euro ($1,357) face amount, to 92.63. The five-year note yield slid 59 basis points to 6.98 percent.

Italy sold 5 billion euros of bills at an average yield of 6.087 percent, up from 3.570 percent on similar-maturity securities sold last month. Demand was 1.99 times the amount on offer, compared with 1.88 times last month.

ECB Buying

The ECB bought Italian bonds, according to five people familiar with the transactions, who declined to be identified because the deals are confidential. It also bought Spanish securities, two of the people added. The ECB was not immediately available for comment when contacted by telephone.

After tomorrow’s vote on austerity measures in the Italian Senate, the Chamber of Deputies may vote the following day, and Prime Minister Silvio Berlusconi will resign “immediately,” Angelino Alfano, the secretary of Berlusconi’s People of Liberty party, said on state-owned Rai television last night.

Former European Union Competition Commissioner Mario Monti may be nominated to succeed Berlusconi as soon as Nov. 13, newspaper Il Sole 24 Ore reported.

“Implementation of structural reforms would be welcomed by the ECB, prompting more support for Italian and Spanish government bonds,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “This has helped to stabilize risk markets and Italian bonds, taking the shine off bunds.”

Bunds Fall

The yield on 10-year German bunds, Europe’s benchmark government debt securities, rose as much as nine basis points to 1.81 percent. The bonds pared their decline, leaving the yield at 1.78 percent, after ECB Governing Council member Klaas Knot said the ECB can’t do “much more” to stem the euro region’s debt crisis.

European efforts to speed the setup of a permanent rescue fund have lost momentum amid a clash between Germany and France over provisions to force bondholders to share losses, three people involved in the negotiations said. Finance ministers this week failed to bridge divisions over the European Stability Mechanism, lessening the chances of activating its 500 billion- euro war chest next July, said the people, who declined to be identified because the talks are in progress.

EU Sanctions

The additional yield investors receive for holding 10-year French, Austrian and Belgian bonds instead of benchmark German bunds rose to euro-era records amid concern the region’s debt crisis is spreading after the rout of Italian securities yesterday.

The French-German yield spread jumped 22 basis points to 170 basis points.

European Union Economic and Monetary Affairs Commissioner Olli Rehn warned five EU nations, including Belgium, to speed up their deficit-cutting efforts or face sanctions.

The European Commission lowered its euro-region growth forecast for next year by more than half and data reports showed French and Italian industrial production declined in September.

“The ECB can come in and contain things and they’ll have to because it’s the only plan in town,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. “We need something big and fast.”

German bunds have returned 9.2 percent this year, matching U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds have lost 11 percent.

--With assistance from Keith Jenkins and Lucy Meakin in London and James G. Neuger in Brussels. Editors: Matthew Brown, Mark McCord

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

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

© Copyright 2014 Bloomberg News. All rights reserved.

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