Italian Bonds Rise With European Peers as Summers Quits Fed Race

Italian bonds rose with other European government securities after Lawrence Summers’ withdrawal from the race to be the next Federal Reserve chairman spurred bets the U.S. will be slower to reduce debt purchases.

Italy’s 10-year yields fell the most in more than two months as investors bet the preferred candidate is now Fed vice chairman Janet Yellen, who is seen as favoring a slower reduction of stimulus. German, Dutch and French securities also rallied. Investors should bet the extra yield on longer-maturity government bonds over shorter ones will widen, according to Pacific Investment Management Co.

“After Summers withdrew, the market thinks that Yellen will be the next Fed President and she has a dovish bias,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “The market is thinking that Yellen will continue the current stimulus policies and that’s why you see bonds rising. It’s not at all clear for the bond markets because Yellen will still have to react to the economic conditions.”

Italy’s 10-year yield fell 12 basis points, or 0.12 percent point, to 4.46 percent at 4:54 p.m. London time, the biggest drop since July 1. The 4.5 percent bond due May 2023 rose 0.92, or 9.20 euros per 1,000-euro ($1,335) face amount, to 100.70.

Similar-maturity Spanish yields declined seven basis points to 4.42 percent, while Portugal’s slipped 16 basis points to 7.26 percent.

Summers, Yellen

Summers would tighten Fed policy more than Yellen if he replaced Chairman Ben S. Bernanke, according to a Bloomberg Global Poll last week. The Fed will taper its monthly bond buying program by $10 billion to $75 billion when it meets on Sept. 17-18, a separate survey of economists showed.

“When Summers was the frontrunner there was greater uncertainty about the outlook,” Andrew Balls, head of European portfolio management at Pimco in London, said on Bloomberg Television’s “The Pulse” with Francine Lacqua. “We would see Janet Yellen as continuation of what we’ve seen with Ben Bernanke. She’s been a key architect, a key supporter of Mr. Bernanke so you get less uncertainty, therefore potentially less volatility, and an expectation that Janet Yellen will, at the margin, be slower at tapering.”

Germany’s 10-year yield fell four basis points to 1.94 percent after dropping to 1.92 percent, the lowest level since Sept. 3. Dutch 10-year yields declined five basis points to 2.30 percent, while similar-maturity French rates dropped six basis points to 2.48 percent.

Curve Steepening

Curve-steepening positions “make sense” Balls said, referring to bets that the yield difference between longer- and shorter-maturity debt will increase. Newport Beach, California-based Pimco is a unit of Munich-based insurer Allianz SE (ALV) and runs the world’s biggest bond fund.

The spread between German two- and 10-year yields narrowed three basis points to 1.73 percentage points after expanding to 1.82 percentage points on Sept. 11, the widest level since December 2011.

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

“It’s a general move in rates” driving European yields lower,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “All of it will be on what we get over the next few days, certainly Wednesday with the Fed and tapering.”

‘Its Infancy’

Euro-region government bonds also advanced as European Central Bank President Mario Draghi said the euro area’s recovery was “only in its infancy.”

“The economy remains fragile, and unemployment is still far too high,” Draghi said in Berlin. “Given the overall subdued outlook for inflation extending into the medium term, the ECB’s Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period.”

Annual inflation in the euro area slowed to 1.3 percent from 1.6 percent in July, in line with an initial estimate on Aug. 30, the European Union’s statistics office in Luxembourg said today. In the month, prices rose 0.1 percent.

German bonds lost 2.5 percent this year through last week, according to Bloomberg World Bond Indexes. Italian securities returned 2.8 percent, while Spain’s earned 7.9 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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

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