Italian Bonds Fall Most in Two Weeks as ECB Optimism Fades; Bunds Decline

Italy’s bonds declined, pushing yields up the most in two weeks, amid fading optimism that euro- area officials are near to resolving the region’s debt crisis.

German bunds fell after a U.S. report showed employers added more jobs last month than economists forecast, reducing demand for safer assets. Portugal’s bonds slid as Moody’s Investors Service said it cut the ratings on nine of the nation’s banks. Spanish debt advanced as the European Central Bank was said to purchase the country’s securities along with those of Italy. Fitch Ratings cut Italy and Spain’s credit ratings after the bond markets closed.

“The concern for investors is that we are not so close to a solution” to Europe’s debt crisis, said Alessandro Giansanti, a senior interest-rates strategist at ING Groep NV in Amsterdam. Portugal is the country “most at risk of a restructuring after Greece,” he said.

The yield on Italy’s 10-year bond climbed seven basis points to 5.52 percent at 5 p.m. in London. The rate increased as much as 14 basis points, the most since Sept. 20. The 4.75 percent security due September 2021 fell 0.485, or 4.85 euros per 1,000-euro ($1,349) face amount, to 94.720.

Portuguese 10-year bond yields increased five basis points to 11.25 percent. Greek 10-year rates climbed 28 basis points to 23.53 percent.

German Chancellor Angela Merkel and French President Nicolas Sarkozy, divided on whether to insist on greater losses for Greek bondholders, are due to meet in Berlin on Oct. 9 to discuss the debt crisis. European Union leaders will discuss banks’ capital at their summit on Oct. 17-18, Merkel told reporters today in Berlin. Greece isn’t likely to have a “central role” in the summit, she said.

Pressure for Plan

European leaders are under pressure to devise a comprehensive plan to support banks after Dexia SA was pushed toward a breakup, with France, Belgium and Luxembourg seeking to protect their local units of the lender.

If leaders don’t address the crisis “in a credible way, I believe within perhaps two to three weeks we will have a meltdown in sovereign debt, which will produce a meltdown across the European banking system,” Robert Shapiro, an adviser to the International Monetary Fund, told the British Broadcasting Corp.’s Newsnight yesterday.

Italy’s bonds also dropped after the nation said it plans to sell debt maturing between 2016 and 2025 next week.

Supply Concern

“The downside that we are seeing in Italian bond prices is supply related,” said Matteo Regesta, a senior fixed-income strategist at BNP Paribas SA in London. “Some seem to be trying to create concession ahead of the sale. It doesn’t help that this is occurring against the backdrop of negative sentiment towards policy makers.”

Fitch Ratings cut Italy’s credit ratings A+ from AA-, citing concerns about the nation’s vulnerability to the “euro- zone crisis.” It lowered Spain’s rating by two notches to AA- from AA+.

German bunds fell for a third day after the U.S. Labor Department said payrolls climbed by 103,000 in September following a revised 57,000 increase the previous month. The median forecast in a Bloomberg News survey was for an increase of 60,000.

German 10-year yields rose six basis points to 2 percent, and two-year rates were little changed at 0.60 percent.

Spanish Bonds

Spanish 10-year bonds advanced after three people with knowledge of the transactions said the ECB bought the nation’s debt today. The central bank also scooped up Italian bonds, said the people who declined to be identified because the trades are confidential.

Spain’s 10-year bond yield declined two basis points to 4.99 percent.

The Dutch parliament’s lower house approved the expansion of Europe’s temporary rescue fund yesterday, leaving only Slovakia and Malta yet to vote on the plan. Slovakia’s Freedom and Solidarity party proposed a compromise in which it would agree with its three partners in the ruling coalition on the overhaul of the temporary bailout mechanism.

“There is progress being made, albeit at a gradual pace,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London.

German bunds have returned 7.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds have lost 2.2 percent and Portuguese have dropped 21 percent.

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