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Italian Bonds Gain as Chinese Manufacturing Improves in March

Italian bonds led gains among Europe’s higher-yielding government securities after a survey showed Chinese manufacturing improved in March, adding to optimism the global economy is recovering.

Italy’s 10-year securities advanced for a second day as a gauge of the nation’s factory output unexpectedly increased this month. China’s Purchasing Managers’ Index climbed to a one-year high, the report showed yesterday. German bunds snapped a four- day advance as the country sold 3.27 billion euros ($4.35 billion) of six-month bills.

“We’ve already had a broad boost to risk appetite from China’s PMI,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Then this morning we’ve had the euro-zone data, which has seen Italy beat expectations while Spain remains at very low levels. Lastly, it’s the beginning of the quarter and last week’s profit taking probably went too far.”

The Italian 10-year yield dropped two basis points, or 0.02 percentage points, to 5.10 percent at 4:21 p.m. London time after falling nine basis points on March 30. The 5 percent bond due March 2022 gained 0.16, or 1.60 euros per 1,000-euro face amount, to 99.75. The nation’s two-year yield fell eight basis points to 2.84 percent.

The extra yield investors demand to hold Italy 10-year securities over similar-maturity bunds shrank to 330 basis points. The spread narrowed to 276 basis points on March 16, the least since Aug. 18.

‘Great Progress’

The euro region has made “great progress” in dealing with its sovereign-debt crisis but it would be dangerous to be too complacent, Italian Prime Minister Mario Monti said in Beijing on March 31.

“Italian rates are coming down smoothly,” said Matteo Regesta, a senior fixed-income strategist at BNP Paribas SA in London. “The market appreciates the efforts of the Prime Minister to make sure overseas investors understand what’s happening in Italy, particularly labor reform. Italy should be relatively stable going forward.”

Spanish bonds also advanced, with the 10-year yield dropping one basis point to 5.34 percent. The spread over bunds narrowed two basis points to 354 basis points.

China’s Purchasing Managers’ Index for manufacturing advanced to 53.1 in March, the logistics federation and the National Bureau of Statistics said. The Italian manufacturing gauge climbed to 47.9, Markit Economics said today, surpassing the prediction of 47.7 in a Bloomberg News survey.

Euro-region manufacturing contracted in March, with an indicator declining to 47.7 from 49 in February. That’s in line with an initial estimate released last month.

Bunds Fall

The German 10-year yield rose one basis point to 1.80 percent after earlier climbing as much as seven basis points to 1.86 percent.

Germany sold six-month bills at an average yield of 0.066 percent, compared with 0.053 percent at the previous auction on March 12. Investors bid for 1.43 times the amount allotted, versus 1.64 times last month.

Dutch 10-year bonds fell two basis points to 2.31 percent after the Netherlands sold 2.14 billion euros of 86- and 267-day bills. French two-year notes rose, with the yield slipping three basis points to 0.53 percent, after it auctioned 7.4 billion euros of bills.

German bunds returned 0.3 percent last quarter, their worst performance in a year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portuguese bonds gained 13 percent, the biggest advance among 26 sovereign markets tracked by the indexes.

Bond Futures

Italian 10-year bond futures may climb to a 10-month high should they close above a key level of so-called resistance, UBS AG said, citing trading patterns.

The contracts have “broken above the immediate resistance offered by the 38 percent retracement of the March selloff at 104.99,” Richard Adcock, head of fixed-income technical strategy at UBS in London, wrote in a research note. Should the price close above this level, “we will be looking for a fresh extension of the long-term uptrend and a test of resistance offered by the 138 percent extension of the March selloff at 109.54,” he said.

The 10-year contract expiring in June rose 0.1 percent to 104.77 after climbing as much as 0.9 percent to 105.56. The so- called lead contract last traded as high as 109.54 on June 6, according to data compiled by Bloomberg. Resistance refers to an area where sell orders may be clustered.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

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

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