Italian Bonds Drop Before Auction Amid Berlusconi Pact

Italian and Spanish 10-year government bonds declined for a second day before the nations hold their first debt sales of the year later this week.

Italian yields rose following their biggest weekly decline since November, as former Prime Minister Silvio Berlusconi renewed his political partnership with the Northern League before a general election next month. German 10-year bonds advanced for the first time in four days as a report showed euro-area producer-price inflation slowed more than economists estimated in November.

“The market is making room for more supply,” said Elwin de Groot, a market economist at Rabobank Nederland in Utrecht, the Netherlands. “Investors are also assessing the political situation in Italy. There’s still a lot of uncertainty ahead and they are judging if the spreads adequately compensate them for political risks.”

The yield on 10-year Italian bonds climbed nine basis points, or 0.09 percentage point, to 4.35 percent at 4:45 p.m. London time. The 5.50 percent bond maturing in November 2022 fell 0.705, or 7.05 euros per 1,000-euro ($1,310) face amount, to 109.475. The rate dropped 23 basis points last week, the most since the period ended Nov. 30.

Spanish 10-year bond yields climbed six basis points to 5.11 percent. Spain will sell securities due between 2015 and 2026 on Jan. 10. Italy may announce details of its Jan. 11 auction tomorrow.

Berlusconi Agreement

Berlusconi’s People of Liberty party reached an agreement with the Northern League to run together in February elections, he said today on RTL radio. While the coalition’s campaign will be led by Berlusconi, the premiership would be determined after the vote and he would consider serving as finance minister, he said. The League, which served in all three of Berlusconi’s governments, opposed his candidacy for premier.

Prime Minister Mario Monti was appointed in November 2011 after Berlusconi’s last government unraveled at a time when 10- year bond yields topped 7 percent. The yield difference with German bonds has narrowed to 280 basis points today, from the euro-era record of 575 basis points on Nov. 9, 2011.

Italian debt maturing in a year or more gained 1.3 percent this month through Jan. 4, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds returned 1.4 percent and German securities lost 1.4 percent.

Germany’s 10-year bund yield fell two basis points to 1.52 percent. The yield on 10-year French securities dropped three basis points to 2.11 percent.

France sold six-month bills today to yield zero percent, compared with the previous auction yield of minus 0.003 percent on Jan. 2.

Break-even Rates

Factory-gate prices in the 17-nation euro region rose 2.1 percent from a year earlier after a 2.6 percent increase in October, the European Union’s statistics office in Luxembourg said today. Economists had forecast an increase of 2.4 percent, the median of 13 estimates in a Bloomberg News survey showed.

“Despite some improvement in recent flows of data in the euro zone, the overall economy remains weak,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “Demand for the safest assets will not evaporate given there are still question marks out there on a number of issues.”

Germany’s 10-year break-even rate stayed higher after the producer-price data. The gauge of market inflation expectations derived from the yield gap between government bonds and index- linked securities, rose one basis point to 1.75 percentage points. The average in the past five year is 1.77 percentage points.

Core Bonds

Other so-called core bonds including those issued by Finland, the Netherlands and Austria advanced before European Central Bank policy makers meet on Jan. 10. Even as politicians and economists brace for recession, only five out of 55 economists in a Bloomberg News survey expect an interest-rate cut at the meeting. The yield on 10-year Austrian debt declined four basis points to 1.88 percent.

Volatility on Austrian bonds was the highest in euro-region markets today, followed by those of Italy, according to measures of 10-year or equivalent-maturity debt, the spread between two- and 10-year securities, and credit default swaps.

The central bank will keep the key rate unchanged at a record low of 0.75 percent until at least the first quarter of 2014, a separate survey showed.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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

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