Italian 10-year yields dropped to the lowest level in eight years as Renzi, who was given a mandate today by President Giorgio Napolitano, set about building a parliamentary majority by outlining a 100-day legislative program. Portuguese 10-year yields fell to the least since 2010 as signs the region’s economic recovery is gaining momentum fueled demand for higher-yielding assets. German bonds declined as demand for the euro area’s safest securities waned.
“The odds are high for a Renzi-led government and he is seen as someone who is more proactive than Letta,” said Rainer Guntermann, a fixed-income strategist at Commerzbank AG in Frankfurt. “It’s a hunt-for-yield environment. Core countries offer yields that are too low for many investors and peripheral spreads are still quite attractive.”
Italy’s 10-year yield fell six basis points, or 0.06 percentage point, to 3.63 percent at 4:25 p.m. London time after declining to 3.61 percent, the lowest level since January 2006. The 4.5 percent bond due in March 2024 rose 0.515, or 5.15 euros per 1,000-euro ($1,371) face amount, to 107.565.
Napolitano asked Renzi, the Democratic Party leader, to try to form a government after previous premier Enrico Letta resigned last week. Renzi promised an overhaul of voting laws and then measures in March to stimulate hiring. Those would be followed by policies to reduce bureaucracy and modify the tax code, he said today in Rome.
Volatility on Italian bonds was the highest in euro-area markets today, followed by those of Portugal and Spain, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.
The extra yield on Italy’s 10-year bonds over similar-maturity German bunds contracted seven basis points to 194 basis points after shrinking to 191 basis points, the narrowest since July 2011.
Spain’s 10-year yield fell four basis points to 3.55 percent after dropping to 3.51 percent, the lowest level since March 2006. The rate on similar-maturity Portuguese bonds declined as much as 13 basis points to 4.82 percent, the least since June 2010.
Bonds of Europe’s most indebted nations are extending gains that started with European Central Bank President Mario Draghi’s 2012 pledge to do whatever it takes to safeguard the region’s monetary union. A report last week showed gross domestic product rose by more in the third quarter than economists predicted.
German bunds dropped for a second day, with the 10-year yield climbing one basis point to 1.68 percent.
Italian bonds should outperform those of Spain as the nation has a higher credit rating, said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam.
Italy ranks better than Spain in terms of fiscal deficit, private leverage and debt dynamics in ING’s own rating model, Garvey wrote in a research note. Moody’s Investors Service changed Italy’s credit rating to stable from negative on Feb. 14, citing the government’s financial strength.
Italian securities returned 2.8 percent this year through Feb. 14, Bloomberg World Bond Indexes show. Spain’s rose 3.6 percent and Germany’s gained 1.9 percent.