Italian, Spanish Bonds Rise as Italy Cancels Debt Auctions on Cash Surplus

Italian and Spanish 10-year government bonds rose after Italy canceled debt sales, citing a surplus of cash.

Ten-year debt advanced for the first time in three days after Italy said yesterday it would cancel an auction of medium- to long-term bonds scheduled for mid August “considering the large cash availability and the limited borrowing requirement.” Italian two-year notes fell after demand slid at a bill sale.

“The environment is highly fragile and volatile, that’s what you see today,” said Norbert Aul, a European rates strategist at RBC Capital Markets in London. “The Italian auction cancellation provided some relief,” though today’s debt sales provided some negative market reaction, he said.

The yield on 10-year Italian bonds slipped three basis points to 5.63 percent as of 5:05 p.m. in London, reversing an earlier increase to 5.72 percent. Similar-maturity Spanish yields dropped seven basis points to 5.96 percent, after rising to as much as 6.07 percent.

Benchmark bund yields fell two basis points to 2.74 percent. The 3.25 percent security maturing in July 2021 rose 0.205, or 2.05 euros per 1,000-euro face amount, to 104.365.

Bill Auctions

The difference in yield between Italian and Spanish bonds and their German counterparts, narrowed for the first day in three. The Italian 10-year security yielded 289 basis points more than similar maturity bunds, while the Spanish-German spread declined to 321 basis points.

Italy said it sold 7.5 billion euros ($10.9 billion) of six-month bills at an average yield of 2.269 percent, the highest in 2 1/2 years. Investors bid for 1.56 times the debt offered, down from 1.72 times in June. Spain auctioned 2.89 billion euros of three- and six-month bills, with yields rising and demand falling from a sale in June, data from the Bank of Spain showed.

“If you think that the market is buying into the EU summit of last week then you’d expect to see better T-bill auctions,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The auction yields were significantly higher than last time round. Demand for Spanish paper does look weaker.”

The six-month Spanish bills drew an average yield of 2.519 percent, with the so-called stop-out rate, the highest yield paid, 13 basis points higher at 2.65 percent.

Greek Bailout

Euro-region leaders seeking to stem the region’s debt crisis, decided on 159 billion euros of new aid for Greece last week and new powers for the 440 billion-euro rescue fund. Banks will voluntarily agree to write down the value of their Greek securities by 21 percent as part of the bond exchange and debt buyback program, the Institute of International Finance said July 22.

German bunds advanced for a third day as investors sought a refuge from turmoil in the U.S. debt market. President Barack Obama’s administration and Republican lawmakers remain at an impasse on raising the debt ceiling to avoid a default.

German government bonds handed investors 1.6 percent this year, compared with 3.3 percent for U.S. Treasuries and 0.1 percent for Spanish debt, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italy’s bonds have lost 2.5 percent, while Portugal’s have declined 23 percent, the indexes show.

Deutsche Bank AG had net sovereign risks related to Portugal, Italy, Ireland, Greece and Spain of 3.67 billion euros as of June 30, a decline of 70 percent from the 12.1 billion euros at the end of 2010, the bank said today in its second- quarter earnings. The bank had a 155 million-euro writedown related to Greek government bonds, it said.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net. Paul Dobson in London at pdobson2@bloomberg.net

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