Italy Notes Rise a Third Day as Borrowing Costs Fall at Auction

Italy’s two-year notes rose for a third day as borrowing costs declined at a debt sale and concern that Prime Minister Mario Monti’s resignation will cause a political vacuum eased.

Ten-year bonds held two days of gains after former Prime Minister Silvio Berlusconi said he may withdraw his bid to be prime minister, throwing into doubt a comeback bid that threatened to undermine budget-cutting measures. Greek bonds advanced for a sixth day after euro-area finance ministers approved rescue payments that will keep the country solvent. German bunds declined for a fourth day as European officials met in Brussels.

“Yields at the Italian sale were very satisfactory, lower than last month,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA (UCG) in Milan. “Despite the recent political events, investors have taken a constructive view.”

The Italian two-year yield fell four basis points, or 0.04 percentage point, to 2.06 percent at 4:37 p.m. London time after declining as much as eight basis points. The 6 percent note maturing in November 2014 rose 0.07, or 70 euro cents per 1,000- euro ($1,307) face amount, to 107.355. Ten-year yields were little changed at 4.64 percent.

Italy sold 3.5 billion euros of a new three-year bond at a yield of 2.50 percent, down from 2.64 percent at a previous auction of the maturity on Nov. 14. Investors bid for 1.36 times the number of securities sold at the three-year sale, the lowest so-called bid-to-cover ratio since January.

“Given the recent political events it was good that they managed to get the supply away,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “The bid-to-cover on the three year wasn’t very good.”

Moderate Bloc

Monti said on Dec. 8 he would resign as soon as the 2013 budget is passed. He spoke after Berlusconi’s party withdrew support for the premier’s unelected government.

“If Monti decides to accept the request of the whole moderate bloc” and seek the premiership, “I would not have any problem in withdrawing my bid to be prime minister and could accept to be the coordinator of the coalition,” Berlusconi told reporters in Rome late yesterday.

European Commission President Jose Barroso told reporters in Brussels today that he spoke with Berlusconi and told him Italy must continue reforms. Europe needs a strong, “stable” Italy, he said.

Greece’s 10-year yield fell 17 basis points to 12.97 percent. The 2 percent bond due in February 2023 rose 0.585 to 44.535 percent of face value.

Rubber Stamp

Finance chiefs meeting in Brussels today rubber-stamped the next tranches of aid for Greece after wrapping up a 14-hour negotiation on a banking union at 4:30 a.m. Of the funds, 34.3 billion euros will be released within the next few days with the remaining money paid in the first quarter, they said.

German 10-year bund yields rose two basis points to 1.35 percent. France’s five-year government yields reached a record- low 0.582 percent, and the rate on similar-maturity Austrian securities also dropped to an all-time low.

“Investors are chasing yield, chasing pickup, chasing duration,” Peter Schaffrik, head of European rates strategy at Royal Bank of Canada in London said in interview on Bloomberg Television’s “The Pulse” with Maryam Nemazee. Bonds from nation’s like France and Austria “are the first natural choice once you go beyond the bunds. It shows me that the tensions in Italy, so far remain isolated.”

German bonds returned 4.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italy’s securities gained 19 percent and Spain’s rose 5.3 percent.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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