Italian Bonds Decline as Borrowing Costs Climb at Debt Auction

Italian bonds fell, with two-year yields rising the most in two weeks, as borrowing costs increased at an auction amid concern a political deadlock will derail plans to fix the nation’s finances.

Shorter-maturity notes led declines as the country sold 3.32 billion euros ($4.3 billion) of securities due in December 2015 at an average yield of 2.48 percent versus 2.30 percent at the previous offering last month. Spain’s 10-year bonds snapped a 10-day rally. Ireland’s bonds rose even as the nation sold about 5 billion euros of securities through banks in its first 10-year debt issuance since a 2010 bailout.

“The market is a bit complacent about the risks that can happen in Italy,” said Mohit Kumar, head of Europe and U.K. rates strategy at Deutsche Bank AG in London. “If you have a government that is unable to pursue structural reforms, it will have an impact on economic growth in Italy.”

Italy’s two-year yield rose 10 basis points, or 0.1 percentage point, to 1.87 percent at 4:40 p.m. London time, after increasing as much as 14 basis points, the most since Feb. 26. The 6 percent note due November 2014 declined 0.21, or 2.10 euros per 1,000-euro face amount, to 106.725. The 10-year bond yield climbed seven basis points to 4.67 percent.

The Rome-based Treasury also allotted 2 billion euros of securities maturing in 2028 at 4.90 percent compared with 4.805 percent when they were sold via banks on Jan. 15. The bond auctions were the first since the nation’s debt was downgraded by Fitch Ratings on March 8.

Below Target

Italy also sold 2017 and 2018 floating-rate notes, pushing total sales to 6.99 billion euros today, less than the 7.25 billion-euros target.

The rate on Spanish 10-year bonds climbed four basis points to 4.77 percent.

Italy’s government bond yields have increased since elections on Feb. 24-25 failed to provide a clear winner, threatening political paralysis that may derail outgoing Prime Minister Mario Monti’s austerity program. Fitch lowered Italy’s credit rating one level to BBB+, saying the political deadlock would make it harder for the government to respond to recession.

Italian and Spanish bonds also fell as industrial production in the euro area dropped more than economists forecast.

Factory production slipped 0.4 percent in January from December, when it rose a revised 0.9 percent, the European Union’s statistics office in Luxembourg said today. The median forecast in a Bloomberg News survey of 32 economists was for a 0.1 percent decline.

Irish Sale

Ireland’s new bond was sold at a yield of about 4.15 percent, Finance Minister Michael Noonan told reporters in Dublin today, saying the country received more than 400 separate offers from investors.

“Ireland coming to market is a further step toward a normalization of the bond market,” said Mark Dowding, a London- based senior fixed-income manager at BlueBay Asset Management, which oversees about $50 billion including Irish bonds. “It may pave the way for a credit-rating upgrade and can be seen in a positive light.”

The yield on Ireland’s 5 percent bond maturing in October 2020 fell one basis point to 3.65 percent.

Germany sold an additional 4.32 billion euros of two-year notes at an average yield of 0.06 percent, down from 0.21 percent at a Feb. 13 auction. That compares with a record-low auction yield of minus 0.06 percent set on July 18.

Benchmark 10-year bund yields were little changed at 1.48 percent.

Volatility on Italian bonds was the highest in euro-area markets today, followed by those of Finland and Spain, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.

Italian bonds returned 0.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Germany’s bunds handed investors a loss of 0.7 percent and Spanish securities gained 4.6 percent.

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