Italian and Spanish bonds rose this week as investors bet the European Central Bank’s pledge to buy the securities of struggling countries would prevent turmoil in Cyprus from spreading to other high debt and deficit nations.
Italy’s 10-year yield fell to the lowest in three weeks yesterday as President Giorgio Napolitano asked Democratic Party leader Pier Luigi Bersani to try to form a government, a month after inconclusive elections. The bonds of so-called peripheral nations slid at the start of this week as Cyprus sought, then rejected, an unprecedented tax on bank deposits, threatening to reignite Europe’s debt crisis. ECB President Mario Draghi pledged in July to do “whatever it takes” to protect the euro.
“The markets appear to be taking a relatively sanguine view that the crisis in Cyprus will be contained and not spill over into other peripherals,” said Nick Stamenkovic, a strategist at RIA Capital Markets Ltd. in Edinburgh. “The ECB’s backstop is providing strong support for Italy and Spain. The situation is Cyprus is not perceived as a danger to the single currency.”
Italy’s 10-year yields fell eight basis points, or 0.08 percentage point, this week to 4.52 percent after dropping to 4.49 percent yesterday, the lowest since Feb. 25. The 5.5 percent bond due in November 2022 rose 0.655, or 6.55 euros per 1,000-euro ($1,298) face amount, to 107.995.
Similar-maturity Spanish yields declined seven basis points to 4.86 percent, with the securities completing their fifth weekly gain in six weeks.
Cypriot lawmakers rejected a 5.8 billion-euro levy on bank deposits imposed by the euro-area as a condition for a bailout, leaving the nation with a political deadlock. The ECB said it would cut emergency funds to banks in the Mediterranean nation after March 25 unless a bailout program with the European Union and International Monetary Fund is in place.
Bersani won a majority in the lower house in the Feb. 24-25 parliamentary elections but fell short in the Senate, creating a political vacuum and endangering efforts to resolve the nation’s debt crisis.
German bunds gained for a second week as concern the region’s debt turmoil will still worsen underpinned demand for safer assets.
The Ifo institute in Munich said yesterday its business climate index declined to 106.7 from 107.4 in February. That’s the first drop in five months. Economists predicted a gain to 107.8, according to a Bloomberg News survey.
Ten-year bund yields dropped eight basis points this week to 1.38 percent. Austrian 10-year yields fell five basis points to 1.68 percent after declining to 1.63 percent, the lowest since Bloomberg began collecting the data in 1993.
Italian bonds have handed investors a return of 8 percent in the past 12 months, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities gained 9 percent and German bunds earned 5.4 percent.