Italian, Spanish Bond Markets Rally Despite Weakness in Economies

Friday, 26 Apr 2013 09:53 AM

By Dan Weil

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The Italian and Spanish bond markets are experiencing robust rallies, despite the weakness of their economies.

Bond investors have drawn encouragement from last year’s pledge by the European Central Bank (ECB) to protect the region’s bond markets, The Wall Street Journal reports.

Italian 10-year bond yields have dropped below 4 percent from more than 6 percent last July. Meanwhile, the economy shrank 2.8 percent in the fourth quarter from a year earlier, the biggest decline since 2009. And the story is similar in Spain.

Editor's Note:
The IRS’ Worst Nightmare — How to Pay Zero Taxes

On Wednesday, Italy sold two-year zero-coupon bonds at the lowest yield it has received for them since the 1999 beginning of the euro.

As for the ECB, its promises to stand behind European bonds and the euro have made a difference, some investors say.

Its actions "provide a sort of cloak of certainty and a very important foundation," Nick Gartside, international chief investment officer for fixed income at J.P. Morgan Asset Management, told The Journal.

But not everyone feels that way. "The markets are overestimating the capacity of the European Central Bank to intervene in case of need," Roberto Perotti, an economist at Bocconi University in Milan, told the paper.

Anthony Peters, a fixed income strategist at Swissinvest, expresses wonderment that the Italian bond market is riding so high.

“Not bad for a country which has supplied the most opaque of election results, has shown little in terms of fiscal discipline and which has seen little growth in anything other than political promises," he wrote in a commentary obtained by CNBC.

Editor's Note: The IRS’ Worst Nightmare — How to Pay Zero Taxes

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