Bunds Rise as U.S. Budget Deadline Nears; Italian Notes Decline

German 10-year bunds advanced, pushing yields to the lowest in more than two weeks, as concern that U.S. lawmakers won’t agree a deal to avert $600 billion in spending cuts and tax increases fueled demand for safety.

Bund yields were also set for their second straight monthly decline as President Barack Obama summoned congressional leaders to a White House meeting yesterday before the Dec. 31 deadline to reach an agreement that would avoid the so-called fiscal cliff. Italian five-year note yields had the biggest weekly increase in two months as borrowing costs rose at an auction of 5.9 billion euros ($7.8 billion) of government debt maturing in 2017 and 2022 yesterday.

“The fiscal cliff has dominated the markets over the past few days,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, the Netherlands. “Italy came back on the radar.”

Germany’s 10-year yield fell seven basis points, or 0.07 percentage point, this week to 1.31 percent at 5 p.m. London time yesterday, after slipping to 1.29 percent, the least since Dec. 11. That was the first weekly drop in yields since Dec. 7. The 1.5 percent bund due September 2022 rose 0.6, or 6 euros per 1,000-euro face amount, to 101.715.

President Obama returned early from his holiday 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.

Italian Auctions

Italy sold 2.87 billion euros of notes due in November 2017 at an average yield of 3.26 percent yesterday, 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.

Yields on Italy’s five-year notes climbed 13 basis points this week to 3.31 percent, the biggest increase since the period ended Oct. 26. Those on 10-year bonds rose three basis points to 4.50 percent.

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 Candidacy

Prime Minister Mario 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 even as he said he won’t run.

Trading in euro-region government bond futures will be closed from Dec. 31 through Jan. 1, according to the website of Eurex, a derivatives-exchange unit of Frankfurt-based Deutsche Boerse AG.

Germany is scheduled to sell an additional 5 billion euros of two-year notes on Jan. 2, while France is due to auction as much as 8 billion euros of debt maturing between 2019 and 2032 a day later.

German bonds returned 4.4 percent this year through Dec. 27, 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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