Italy’s 10-year yields dropped to the lowest level since 2006 this week amid investor bets that a transition of power won’t immediately damage the ability of Europe’s biggest debtor to finance itself.
Volumes on Italian bond futures climbed to the highest in a year on Feb. 13 as Prime Minister Enrico Letta agreed to step down under pressure from his party’s leader Matteo Renzi. The additional yield, or spread, investors demand to hold Italy’s 10-year bonds over equivalent-maturity German bunds slipped toward a 2 1/2-year low. Portugal sold securities for a second month and Spain’s 10-year borrowing costs slid to the least in eight years as investors favored higher-yielding assets.
“For the short term, I would still be long, just based on the spread,” Steven Major, London-based head of global fixed-income research at HSBC Holdings Plc, Europe’s largest bank, said in an interview on Bloomberg Television’s “The Pulse” with Francine Lacqua and Guy Johnson. “Nothing much can happen in the near term. Something’s going to break in a matter of months because the volatility is quite low compared to where the risk premium is building up.” A long position is a bet the price of an asset will appreciate.
Italy’s 10-year yield slipped less than one basis point, or 0.01 percentage point, in the week to 3.69 percent at 5 p.m. London time yesterday after it dropped to 3.66 percent on Feb. 13, the lowest level since February 2006. The price of the 4.5 percent bond due in March 2024 was at 107.05.
Trading volumes on front Italian BTP bond futures reached 90,189 contracts on Feb. 13. That’s the most since Feb. 26, 2013 in the aftermath of inconclusive elections that led to the formation of Letta’s government two months later.
The yield on German 10-year bunds increased two basis points to 1.68 percent this week, narrowing the spread with equivalent Italian securities to as little as 197 basis points. The spread fell to 192 basis points on Jan. 9, the least since July 2011.
Italy nation auctioned three-year debt at a record-low yield of 1.41 percent on Feb. 13. Portugal, which is due to exit an international bailout program in May, sold 3 billion euros ($4.1 billion) of debt due in 2024 via banks this week. The nation’s 10-year yield was little changed in the week at 4.94 percent. The rate on similar-maturity Spanish bonds dropped to 3.57 percent yesterday, the least since March 2006.
The ZEW Center for European Economic Research in Mannheim will say on Feb. 18 German investor confidence rose this month to 44 from 41.2 in January, according to economists surveyed by Bloomberg. Euro-area manufacturing and services expanded in February, with a composite index rising to 53.1 from 52.9 in the previous month, a separate survey shows. Belgium, the Netherlands, Germany, Spain and France will offer bonds next week.
The securities of the euro area’s higher debt and deficit nations have outperformed bunds since the start of the year according to Bloomberg World Bond Indexes. Greek bonds returned 9.9 percent through Feb. 13, the best-performing sovereign market followed by Portugal, Slovenia and Spain. Italian securities gained 2.6 percent and German bonds rose 2 percent.
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