Italian Five-Year Notes Fall as Borrowing Costs Rise at Auctions

Italy’s five-year notes dropped, pushing yields to the highest level in more than a week, as borrowing costs increased at a sale of 5.9 billion euros ($7.8 billion) of government debt maturing in 2017 and 2022.

Ten-year bonds posted a weekly loss as the nation is due to hold elections in February, with Prime Minister Mario Monti saying he won’t run. German 10-year bund yields fell to a two- week low amid speculation U.S. lawmakers will fail to reach an agreement on averting $600 billion of tax increases and spending cuts taking effect in January, boosting demand for euro-region’s safest assets.

“We see a risk of underperformance in the new year with supply and going into the elections,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG in Frankfurt. German bunds “will be supported with risk aversion still high and with supply pressures in the periphery,” he said, referring to the euro-area’s higher-yielding government-bond markets.

Italy’s five-year yield rose six basis points, or 0.06 percentage point, to 3.30 percent at 4:47 p.m. London time, after climbing to 3.35 percent, the highest since Dec. 18. The 3.5 percent note maturing in November 2017 fell 0.25, or 2.50 euros per 1,000-euro face amount, to 100.99.

The yield on the nation’s 10-year bond dropped three basis points to 4.50 percent, after rising to 4.58 percent, also the most since Dec. 18. The rate has increased three basis points this week.

Rally Stalls

A rally in Italian bonds this year that pushed the 10-year yield to as low as 4.35 percent on Dec. 19 from a 2012 high of 7.18 percent on Jan. 6, is stalling ahead of elections in February. Monti, who has overseen austerity measures and declines in bond yields since taking office in November 2011, said on Dec. 23 he would consider being the candidate for a party backing his economic agenda.

“Once the elections are out of the way and any accidents are averted,” yields could go lower again, Commerzbank’s Rieger said, without providing forecasts.

Italy sold 2.87 billion euros of notes due in November 2017 at an average yield of 3.26 percent, compared with 3.23 percent at a Nov. 29 auction. The Rome-based Treasury also allotted 3 billion euros of 10-year bonds at 4.48 percent. That’s up from 4.45 percent the last time the securities were sold on Nov. 29, Bank of Italy data showed.

German 10-year yields fell one basis point to 1.30 percent, after dropping to 1.29 percent, the lowest since Dec. 11. U.S. Treasuries advanced for a third day, with the 10-year note yield sliding three basis points to 1.71 percent.

Obama Meeting

U.S. congressional leaders plan to meet with President Barack Obama today and House Republicans said they will convene Dec. 30. The president returned early from his holiday in Hawaii yesterday as lawmakers disputed which party would be responsible for missing the deadline for a debt deal, a failure that could hurt the U.S. credit rating and cause an economic recession. The meeting will be held at 3 p.m. Washington time.

German bunds may underperform Treasuries “on the margin” if there’s no deal to avert the fiscal cliff, as the budget crisis is more a U.S. story, Abhishek Singhania, a strategist at Deutsche Bank AG in London, said in an interview, forecasting that the extra yield investors get for holding Treasuries instead of bunds may fall to 35 basis points.

Ten-year bunds yielded 40 basis points less than similar- maturity Treasuries today, compared with three basis points more on Feb. 2, according to data compiled by Bloomberg.

French Bonds

France’s bonds declined as data showed the economy grew less than originally estimated in the third quarter. Ten-year yields rose two basis points to 1.99 percent.

France’s gross domestic product expanded 0.1 percent in the three months through September, compared with an initial estimate of a 0.2 percent increase, the state statistical institute Insee said. The economy shrank 0.1 percent in the second quarter, Insee said, unchanged from the previous estimate.

German bonds returned 4.4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds earned 21 percent.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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

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