Italian Notes Decline for First Time in Seven Days; Bunds Gain

Italy’s government bonds fell, with two-year notes dropping for the first time in seven days, amid speculation lawmakers will still struggle to resolve the nation’s debt crisis even after ending a political impasse.

Two-year yields climbed from a record low as Enrico Letta, deputy secretary of the country’s biggest political party, was designated prime minister and said he will begin consultations to form a government. German bonds rose as an industry report showed business confidence in the nation worsened in April, increasing speculation the European Central Bank will cut interest rates next month. Germany sold 2 billion euros ($2.6 billion) of 30-year bunds at a record-low yield.

“This may be just a reversal of what we’ve seen in the last few days,” said Owen Callan, an analyst at Danske Bank A/S (DANSKE) in Dublin. “They obviously seem to be putting together some form of government in Italy and while this may get something in the short term, the longer-term future is still quite uncertain.”

Italy’s two-year yield rose 11 basis points, or 0.11 percentage point, to 1.27 percent at 4:25 p.m. London time after falling to 1.125 percent yesterday, the lowest since Bloomberg began compiling data on the securities in 1993. The 6 percent note due November 2014 fell 0.21, or 2.10 euros per 1,000-euro face amount, to 107.215.

Political Vacuum

The two-year yield has fallen from a euro-era record 8.121 percent in November 2011 amid speculation lawmakers will follow through on austerity plans to resolve the nation’s debt crisis even as inconclusive elections on Feb. 24-25 resulted in a political vacuum.

“I am appealing to all political forces and their sense of responsibility,” Letta said today at the presidential palace in Rome after being appointed by President Giorgio Napolitano. “All of the essential reforms must be done together with the largest possible participation.”

The 10-year yield climbed six basis points to 4.01 percent after dropping to 3.89 percent yesterday, the lowest level since October 2010.

The Italian Treasury sold 2.5 billion euros of zero-coupon two-year notes today at a record-low yield of 1.167 percent. Investors bid for 1.66 times the amount offered, compared with 1.43 times at an auction last month. The nation also sold 750 million euros of 10-year inflation-linked bonds.

Bunds Gain

German bunds gained after the Ifo institute said its business climate index, based on a survey of 7,000 executives, dropped to 104.4 this month from 106.7 in March. Economists in a Bloomberg News survey forecast a decline to 106.2.

Germany auctioned 30-year bunds at an average yield of 2.16 percent, down from 2.45 percent at the previous sale of Jan. 30. Investors submitted bids for 2.598 billion euros of the securities, compared with the target of 2 billion euros, the Bundesbank said.

The benchmark 10-year yield fell two basis points to 1.24 percent after declining to 1.19 percent yesterday, the lowest level since July 24.

UBS AG, Rabobank International, Nomura and Royal Bank of Scotland Group Plc (RBS) all changed their forecasts to predict the ECB will cut interest rates after a report yesterday showed euro-area output contracted for a 15th month.

The central bank will reduce its main refinancing rate by 25 basis points to 0.5 percent at its next meeting on May 2, the banks said. Twenty-one of 36 economists in a Bloomberg News survey forecast a rate cut next week.

‘Non-Existent’

“I don’t know why the ECB haven’t cut rates already,” said Robin Marshall, a director of fixed income at Smith & Williamson Investment Management in London, which oversees about $20 billion. “Inflation is within their target, growth is virtually non-existent in the euro zone, they’re going to have to cut again.”

Italian bonds returned 4.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 0.7 percent and Spain’s rose 7.4 percent.

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

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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

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