Investors demanded higher yields to hold Italy (GBTPGR10)’s 10-year bonds instead of Spain’s for the first time in 18 months this week amid concern former Premier Silvio Berlusconi may destabilize the coalition government.
Italy’s borrowing costs rose to the highest this year at a sale of three-year debt as data showed industrial production in the country unexpectedly fell in July. A Senate panel scheduled a vote on whether to expel Berlusconi from the chamber for next Wednesday. German bunds fell this week, pushing yields to a 21-month high amid speculation the Federal Reserve will announce a plan to reduce its asset-purchase program on Sept. 18.
“The question mark over the longevity of the Italian government is a pressing issue and that has been behind the underperformance of Italy versus Spain,” said Richard McGuire, senior fixed-income strategist at Rabobank International in London. “We’ve also had some disappointing data out of Italy.”
Italy’s 10-year yield rose eight basis points, or 0.08 percentage point, this week to 4.58 percent as of 5 p.m. London time yesterday, a fourth consecutive weekly increase. The rate reached 4.62 percent yesterday, the highest since June 27. The 4.5 percent security due in May 2023 dropped 0.565, or 5.65 euros per 1,000-euro ($1,328) face amount, to 99.78.
The rate on similar-maturity Spanish bonds declined three basis points to 4.49 percent. It slid below its Italian counterpart for the first time since March 2012 on Sept. 10. The yield difference, or spread, between Spain’s and Italy’s 10-year securities increased to nine basis points yesterday, the most since March 2, 2012.
Italian 10-year yields have climbed 18 basis points since Berlusconi said on Aug. 30 that he would bring down the government should Enrico Letta’s Democratic Party vote to oust him from the Senate over tax fraud. The rate on Spanish 10-year bonds has dropped five basis points in the same period, while equivalent-maturity bund yields added 12 basis points.
Italy allotted 4 billion euros of three-year notes on Sept. 12 at an average yield of 2.72 percent, the highest since October. The Senate voted on Sept. 11 to allow the Treasury to raise the debt ceiling for this year to 98 billion euros from 80 billion euros.
Germany is scheduled to auction 5 billion euros of two-year notes on Sept. 18, while France and Spain plan to offer government bonds the following day.
Benchmark German 10-year (GDBR10) bund yields increased three basis points this week to 1.98 percent, after advancing to 2.09 percent on Sept. 11, the highest since Dec. 13, 2011.
“Looking at event risk near term, the biggie is the Federal Reserve meeting,” Rabobank’s McGuire said. “That will be key to determining not only how the Spanish auction is received but also the German and the French. Market moves are likely to be anchored in either direction as the market waits for the outcome.”
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