Italy’s government bonds advanced for a second day amid speculation the nation’s lawmakers will set aside differences to form a broad coalition government after inconclusive election results this week.
Spanish and Portuguese securities also rose as Italian Finance Undersecretary Gianfranco Polillo said a union of Pier Luigi Bersani’s Democratic Party and the group led by Silvio Berlusconi was “the only possible way.” Berlusconi, who left office in November 2011 with yields approaching euro-era highs, ran on promises to reverse austerity. Dutch bonds underperformed as the planning agency said its budget deficit will breach the European Union limit. German two-year notes rose.
“There’s speculation that Italy will form a coalition and the market is taking that as positive news,” said Martin Munksgaard, a bond trader at Danske Bank A/S (DANSKE) in Copenhagen. “It might not be a perfect situation but it’s far better than the alternative. Berlusconi might not be as big a threat as the market had feared and European leaders will continue to put pressure on Italy to reform.”
Italy’s 10-year yield fell eight basis points, or 0.08 percentage point, to 4.73 percent at 5 p.m. London time after rising to 4.96 percent yesterday, the highest since Nov. 15. The 5.5 percent bond due in November 2022 gained 0.605, or 6.05 euros per 1,000-euro ($1,312) face amount, to 106.31.
The extra yield investors demand to hold Italy’s 10-year securities instead of similar-maturity German bunds shrank for a second day, narrowing eight basis points to 328 basis points. The spread increased to 351 basis points yesterday, the widest since Dec. 11, amid concern a political vacuum would derail efforts to resolve the nation’s debt crisis.
BlackRock Inc. (BLK), the world’s biggest fund manager with $3.67 trillion in assets, is looking to add to Italian bond holdings after having reduced them, Rick Rieder, the company’s chief investment officer of fundamental fixed-income said in a Bloomberg Television interview.
“We started to add a little bit the other day to try to bring back some of the exposure” after reducing the company’s Italian debt holdings, Rieder said. “This election, isn’t done. It’s going to take a while to form a government. It’s going to make a lot of headlines.”
Spanish bonds were the most volatile in euro-area markets today, followed by those of Italy and Germany, according to measures of 10-year or similar-dated debt, the yield spread between two- and 10-year securities, and credit-default swaps.
The spread of Dutch bonds over German bunds reached the widest since October as the Netherlands’ planning agency said its budget deficit will stay above the EU limit of 3 percent this year and next.
The deficit will reach 3.3 percent of gross domestic product in 2013 and 3.4 percent in 2014 as the economy shrinks and unemployment rises, it said.
Dutch 10-year yields were little changed at 1.74 percent after rising as much as two basis points. The spread over similar maturity bunds widened one basis point to 28 basis points after touching 29 basis points, the most since Oct. 30.
European Central Bank President Mario Draghi signaled yesterday the ECB has no plan to tighten monetary policy with inflation projected to “significantly” undershoot its 2 percent target next year.
“An accommodative stance will continue to lend support for peripheral countries, although deficits are more about structural reforms,” said Mohit Kumar, head of European fixed- income strategy at Deutsche Bank AG in London.
Two-year German note yields fell three basis points to 0.04 percent as Medley Global Advisors said in a note to clients that interest-rate discussion is likely at the ECB’s policy meeting on March 7. The report cited Draghi’s comments that inflation will be “significantly below” 2 percent in 2014.
The euro-area report today showed the inflation rate slowed to 2 percent in January from 2.2 percent in December, in line with an initial estimate on Feb. 1. In the month, prices fell 1 percent, the European Union’s statistics office said.
France’s three-year break-even rate, a gauge of inflation expectations derived from the difference in yield between inflation-linked and nominal bonds, widened five basis points to 1.61 percentage points. France is the region’s biggest market for index-linked debt.
Italian government bonds handed investors a loss of 0.9 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds fell 0.5 percent, while French securities dropped 1 percent.