Italian Bonds Rise as Nation Sells Debt, Political Tensions Ease

Italian government bonds rose for a second day as the nation sold 6 billion euros ($7.93 billion) of five- and 10-year securities amid easing political tension in the euro-region’s third-biggest economy.

Ten-year yields dropped from near the highest level in six weeks after the government led by Prime Minister Enrico Letta yesterday amended an unpopular property tax in a deal that may improve relations with his coalition partner Silvio Berlusconi. German bunds advanced as investors bought securities to meet month-end requirements tied to index revisions. Investors should buy Italian and Spanish bonds as the region’s economy improves, according to HSBC Holdings Plc.

“Overall the auction was a good one,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA (UCG) in Milan, referring to Italy. “Yesterday’s agreement shows there’s a degree of cooperation in the government, so it removes a bit of the political uncertainty. At the margin, this created a more favorable market environment for the auction.”

Italy’s 10-year yield dropped four basis points, or 0.04 percentage point, to 4.38 percent at 4:36 p.m. London time after climbing to 4.48 percent yesterday, the highest since July 18. The 4.5 percent bond due in May 2023 rose 0.285, or 2.85 euros per 1,000-euro face amount, to 101.34.

The Rome-based Treasury sold 3.5 billion euros of notes due in December 2018 at an average yield of 3.38 percent, compared with 3.22 percent at a previous auction on July 30. The government also sold 2.5 billion euros of bonds maturing in March 2024 at 4.46 percent, unchanged from July.

Property Tax

Italy’s government plans to cancel a tax on primary residences this year and replace it in 2014 with a municipal levy, Letta told reporters yesterday after a cabinet meeting in Rome. Berlusconi, a three-time former premier, praised the deal in an e-mailed statement and said Letta lived up to his word.

The government is committed to keeping its budget deficit below 3 percent of gross domestic product this year, Letta said. Spending cuts, levies on gaming and value-added tax receipts will compensate for the loss of revenue from the property levy, he said.

Portugal’s 10-year bonds rose for the fourth time in five days, with the yield dropping three basis points to 6.57 percent. Similar-maturity Spanish yields were little changed at 4.53 percent.

‘More Favorable’

“When you’ve got signs of data picking up and a cyclical upswing, it’s much more favorable in general for the periphery countries,” said Steven Major, the global head of fixed-income research at HSBC in London. “In terms of deleveraging, the periphery has also done a lot more than the core countries.”

Major said investors should buy Italian and Spanish 10-year bonds in the next one to three months, betting the nations’ credit fundamentals will be further boosted by an improving economic backdrop.

Germany’s 10-year bund yield fell two basis points to 1.86 percent after fluctuating between 1.85 percent and 1.90 percent.

Citigroup Inc. (C) said in a report that its European Government Bond Index, one of the key indexes investors use to measure the performance of its funds, will extend by around 0.04 year at the end of August, which is “historically large” for the month.

Bunds were also boosted as the Federal Labor Agency said the number of Germans out of work increased by 7,000 to 2.95 million in August, spurring demand for safer assets.

The annual inflation rate fell to 1.6 percent this month from 1.9 percent in July, a separate report showed.

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

Italian bonds returned 3.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s rose 7.4 percent, while German bunds lost 2.3 percent.

To contact the reporters on this story: Morgane Lapeyre in London at mlapeyre@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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