Italian Bonds Extend Decline as Risks Build for Peripheral Debt

Italian government bonds slid, pushing 10-year yields to the highest in more than six weeks, as investors prepared for European Parliament elections that risk a voter backlash against austerity.

Spanish securities fell for a second day after European Central Bank Governing Council member Ewald Nowotny said negative deposit rates for the euro area “must still be thoroughly discussed,” raising the possibility that stimulus measures next month will disappoint investors. Portugal’s 10-year yield jumped to a one-month high after falling to the lowest since 2006 earlier this month.

“Elections are seen as an event risk,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “Strong performance, some disappointment about recent growth data and uncertainty of the election result provide an excuse to sell.”

Italian 10-year yields jumped 11 basis points, or 0.11 percentage point, to 3.25 percent at 4:23 p.m. London time after climbing to 3.26 percent, the highest since April 3. The 4.5 percent bond due in March 2024 fell 0.92, or 9.20 euros per 1,000-euro ($1,369) face amount, to 110.60.

Spanish 10-year yields climbed eight basis points to 3.09 percent. Rates on Portuguese bonds with a similar maturity climbed 11 basis points to 3.97 percent, the highest since April 14. The rate fell to 3.44 percent on May 9, the lowest since January 2006.

Portuguese Sales

Portugal (GSPT10YR) is considering selling bonds via banks and through auctions as it aims to raise financing to cover “around two thirds” of its 2015 funding needs by the end of this year, Secretary of State for Treasury Isabel Castelo Branco said yesterday in an interview from New York.

The changing of the guard in the European Union decision-making bodies starts with elections to the 751-seat European Parliament on May 22-25, with polls suggesting anti-austerity parties in Greece, Italy and Ireland may make strong showings. That will be followed by the replacement of the 28-strong team that heads the Commission executive body and a new EU President will be appointed at the end of the year.

The euro-area recovery failed to gather momentum last quarter. France’s economy unexpectedly stagnated and gross domestic product from Italy to the Netherlands contracted. The 18-nation region expanded 0.2 percent, data on May 15 showed, half as much as analysts had forecast.

Fragile Recovery

Rising yields have “to do with doubts that have appeared on European economic growth,” Spanish Economy Minister Luis de Guindos said in Madrid today. The European recovery is fragile with disparities between countries such as France or Italy, and others including Spain, where the economy grew faster than the euro region average in the first quarter for the first time since 2009, he said.

An inflation rate that has stayed below the central bank’s goal of just below 2 percent in the past 15 months has fueled speculation the ECB will soon introduce more measures, including bond purchases, to support the economy. ECB President Mario Draghi on May 8 prepared investors for further stimulus in June, saying the 24-member Governing Council is “comfortable with acting” next month.

“The market has come a long way and is ripe for profit taking,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “Some people have already priced in quantitative easing while in fact all we may get is a rate cut. We don’t think the spread tightening trend is reverting, it’s just that the market has got a bit ahead of itself.”

Yield Spreads

The yield on benchmark German 10-year bonds increased one basis point to 1.36 percent. Similar-maturity French bond yields rose two basis points to 1.84 percent.

The extra yield that investors demand for holding Italian 10-year bonds instead of equivalent-maturity German debt widened nine basis points to 1.89 percentage points, the most on a closing-price basis since March 13.

Italy’s 10-year securities yielded 17 basis points more than their Spanish peers, the most since Oct. 1, based on closing Bloomberg generic prices.

Italian Prime Minister Matteo Renzi’s party is facing a challenge from the anti-corruption Five Star Movement, led by self-proclaimed populist comedian Beppe Grillo.

“You don’t have a euro-skeptic party in Spain, so there can be no discussion about a change in government there whereas in Italy, assuming Grillo’s Five Star Movement gets a lot of votes, then there will be an internal debate about the legitimacy of the government,” said Alessandro Tentori, London-based global head of rates strategy at Citigroup Inc.

Italian bonds returned 6.2 percent this year, according to Bloomberg World Bond Indexes. Spain’s handed investors a 7.4 percent gain and German securities rose 4 percent.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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

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