Italian Bonds Drop With Spain’s as EU Says Debt Targets at Risk

Italy’s 10-year government bonds declined for the first time in three days after the European Union Commission said the nation’s budget plan doesn’t respect its 2014 debt targets.

Spain’s securities also dropped as the EU said that, while the nation has taken effective action on its deficit, it too may miss its 2014 target. The extra yield investors demand to hold Italian 10-year debt instead of German bunds climbed from a three-week low as a euro-area report confirmed that inflation slowed to the least in four years last month. Federal Reserve Chairman nominee Janet Yellen said yesterday that easing measures won’t be removed soon.

“I’m not surprised spreads are widening, especially after they reached tight levels with markets too focused on monetary issues and ignoring ongoing fundamental issues,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. “The EU statements do not come as a surprise given that the Italian economy is still struggling to exit recession. Spain has started to see the light at the end of the tunnel but is not that much better.”

Italy’s 10-year yield climbed four basis points, or 0.04 percentage point, to 4.10 percent at 4:39 p.m. London time. The 4.5 percent security due in March 2024 dropped 0.305, or 3.05 euros per $1,000-euro ($1,348) face amount, to 103.725.

The rate on Spanish 10-year bonds increased two basis points to 4.07 percent.

Spread Widens

The yield difference, or spread, between the Italian 10-year securities and similar-maturity German bunds widened three basis points to 239 basis points. The spread narrowed to 234 basis points yesterday, the lowest since Oct. 24.

European bonds climbed yesterday after Yellen signaled that she will maintain the central bank’s stimulus until the world’s biggest economy improves. The Fed currently buys $85 billion of Treasuries and mortgage-backed securities each month to keep downward pressure on borrowing costs.

“Yellen confirmed that policy will remain intact for now so liquidity will remain abundant which is important for all markets,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “Maybe there’ll be some temptation for profit taking during the U.S. session but all in all we think this will be marginal.

Germany’s 10-year yield rose one basis point to 1.71 percent today, having dropped five basis points this week.

The annual inflation rate in the euro area declined to 0.7 percent in October, the lowest since November 2009, the European Union’s statistics office said today. That’s in line with an initial estimate on Oct. 31, and the median forecast of 35 economists in a Bloomberg News survey.

Inflation Insulation

As inflation cools around the world, bonds designed to insulate investors from increases in consumer prices are headed for the first annual loss on record, according to a global index of the debt compiled by Bank of America Merrill Lynch. German indexed-linked securities have dropped 3.1 percent this year, a separate index shows, putting them on course for their worst annual performance since the country issued such debt for the first time in 2006.

The German 10-year break-even rate was at 1.46 percentage points today, the lowest since July 2012, based on closing-market data. The rate, a gauge of inflation expectations, is derived from the yield difference between bunds and index-linked securities.

The European Central Bank unexpectedly cut its main refinancing rate to 0.25 percent on Nov. 7. Pledging to keep borrowing costs low for an ‘‘extended period,” President Mario Draghi said weakening price pressures justified the decision.

Spread Record

The difference in yield between longer-maturity bonds and shorter-term debt has reached the highest on record, according to Bank of America Merrill Lynch Global Broad Market Plus Indexes, as central banks pledge to keep down interest rates for a sustained period of time.

The extra yield investors get for holding bonds maturing in 10 years or more, compared with those due in three-to-five years, increased to 1.80 percentage points yesterday, the widest spread since the indexes began in 2003.

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

Italy’s bonds earned 7 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s returned 11 percent, while Germany’s lost 1.1 percent.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net

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