Italian bonds fell, pushing two-year yields to a euro-era record, as a surge in borrowing costs at a bill sale highlighted concern European leaders are failing in their efforts to resolve the debt crisis.
Italian securities dropped for a fifth day as the nation sold 8 billion euros ($10.6 billion) of six-month bills at a rate of 6.504 percent, up from 3.535 percent last month. The Treasury also auctioned 2 billion euros of zero-coupon bonds at 7.814 percent. French bonds rose for the first time in five days as the government said it will press ahead with an auction next week even after Germany failed to attract enough bids to cover a sale two days ago. German bunds extended a third weekly decline.
“A 7.8 percent yield to borrow for just two years is no fun,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London. “The periphery, and Italy in particular, face a very long, very hard road.”
The Italian 10-year yield jumped 15 basis points, or 0.15 percentage point, to 7.26 percent at 4:36 p.m. London time. The 4.75 percent bond due in September 2021 dropped 0.915, or 9.15 euros per 1,000-euro face amount, to 83.45. Two-year rates climbed 32 basis points to 7.64 percent after reaching a euro-era record 7.923 percent.
Italian bonds fell even as the European Central Bank was said to buy the securities. The central bank purchased the debt according to three people with knowledge of the transactions, who declined to be identified because the deals are private. A spokesman for the ECB in Frankfurt declined to comment.
The yield on Germany’s 10-year bund, Europe’s benchmark security, rose eight basis points to 2.27 percent. The rate has climbed 30 basis points this week, a third weekly increase. The cost of insuring German debt against default rose as much as 12 basis points to 123 basis points.
Ten-year bunds yielded 31 basis points more than similar-maturity Treasuries, the widest spread since April 2009. As recently as Nov. 10, German 10-year yields were 28 basis points below U.S. rates.
“The result of the Italian bond sale today raised a question about its ability to fund itself in the future and that doesn’t bode well for German bonds,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “There is growing concern that saving the euro may turn out to be costly for Germany and other countries.”
German bonds have returned 6.9 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds lost 11 percent, and Spanish debt dropped 2.6 percent.
Spain’s two-year yield rose 20 basis points to 6.10 percent after reaching 6.12 percent, the first time it has exceeded 6 percent in the euro era. Belgian two-year rates jumped five basis points to 5.10 percent.
The cost of insuring against default on sovereign debt rose to a record. The Markit iTraxx SovX Western Europe Index of credit-default swaps linked to 15 governments increased three basis points to 383 basis points. The euro declined to a seven-week low against the dollar.
ECB Government Council member Luc Coene said an interest-rate cut is likely given the current situation.
“There is little chance of comfort in the near future,” Coene said yesterday in Limburg, Belgium, according to the de Tijd newspaper. “If the current trends continue, there will probably follow an additional cut in interest rates.”
French bonds reversed earlier losses after the government said it would press ahead with a plan to sell as much as 4.5 billion euros in debt on Dec. 1.
Agence France Tresor Chief Executive Officer Philippe Mills said earlier the sale was “optional” because France has already completed its funding requirements for 2011.
“If France canceled this planned sale, it might risk unsettling the market even though they are fully funded for this year,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh.
Ten-year yields fell three basis points to 3.69 percent, after rising as high as 3.75 percent.
The five-year breakeven rate, a gauge of inflation expectations derived from the difference between regular and index-linked yields, widened 19 basis points to 1.05 percent.
The expansion was driven by valuation rather than the inflation outlook, according to Herve Cros, head of inflation strategy at BNP Paribas SA in London. The yield of the 1.6 percent French index-linked bond maturing in July 2015 has risen by 150 basis points in the past month.
French inflation bonds “are too cheap, triggering buying flows within the thin liquidity environment,” Cros said.
Hungarian bonds dropped after the nation lost its investment-grade rating at Moody’s Investors Service. The country, which last week turned to the International Monetary Fund for help, had its foreign- and local-currency bond ratings cut one step to Ba1 and Baa3. Five-year yields jumped 70 basis points to 9.56 percent.
Austrian bonds dropped for a fourth day on concern the problems in Hungary will affect its neighbor. Austrian banks are among the largest lenders in the country. The 10-year yield climbed nine basis points to 3.85 percent.
Volatility on Portuguese sovereign debt was the highest in euro-area markets today followed by Italy, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.