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Italy, Spain Bonds Rally, Paring Monthly Slump on Fed QE Concern

Italian and Spanish bonds rose for the first week in eight as European Central Bank President Mario Draghi pledged to keep monetary policy accommodative, boosting the appeal of the region’s fixed-income assets.

Benchmark Italian 10-year yields pared a monthly advance as demand increased at a sale of five- and 10-year debt. European bonds were supported as U.S. policy makers sought to downplay speculation that stimulus in the world’s largest economy will be withdrawn soon. Federal Reserve Chairman Ben S. Bernanke’s June 19 comments that the U.S. may slow asset purchases this year before ending them in mid-2014 had sent euro-area sovereign debt tumbling.

“It always seemed likely that once central bankers started reassuring the markets that nothing was going to change just yet, and, in the case of the ECB, that accommodation is here for the foreseeable future, yields would start to come back in,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “We’ve had a modest but not insignificant correction over the past week.”

Italian 10-year yields dropped seven basis points, or 0.07 percentage point, in the week to 4.55 percent at 4:54 p.m. London time yesterday. The rate has nonetheless climbed 39 basis points in June, adding to a 27 basis-point advance in May.

Spain’s 10-year yield slid 15 basis points to 4.77 percent, trimming its monthly increase to 33 basis points. Germany’s 10-year bund yield added one basis point to 1.73 percent after climbing 21 basis points in the five days ended June 21.

Stay Accommodative

The ECB’s monetary policy “will stay accommodative for the foreseeable future,” Draghi told the French National Assembly in Paris on June 26. “We have an open mind about all other possible instruments that we may consider proper to adopt.”

Fed Bank of New York President William C. Dudley said on June 27 U.S. bond purchases could be prolonged.

Italy sold 2.5 billion euros of debt due in 2023 on June 27. Investors bid for 1.46 times the amount sold, up from a so-called bid-to-cover ratio of 1.38 at a sale in May.

The ECB next meets on July 4 in Frankfurt. Analysts forecast it will keep its main interest rate at a record-low 0.5 percent. Spain plans to sell government debt on the same day.

Italian securities handed investors a return of 1.7 percent this year through June 27, according to Bloomberg World Bond Indexes. Spanish bonds gained 5.2 percent while German securities lost 1.7 percent.

To contact the reporters on this story: Neal Armstrong in London at narmstrong8@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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