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Spain, Italy Bonds Rally on Crisis Optimism; German Notes Rise

Spanish and Italian 10-year bonds rallied for the first week in eight as optimism that France and Germany are aligned on measures to stem the euro-area debt crisis boosted demand for the region’s higher-yielding assets.

Spain’s 10-year yields dropped the most since the period ended Aug. 12 after demand rose at its bond sale on Dec. 1. German two-year note yields dropped to a record on Nov. 30 after the European Central Bank and five other central banks made it cheaper for banks to borrow dollars in a coordinated action to stem the global turmoil. French bonds rose over the week, narrowing the yield difference over German bunds for a second week.

“There’s been a significant improvement in the market mood based on expectations of political commitment to a crisis solution,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit Global Research in Milan. “The announcement by central banks with respect to dollar funding boosted confidence and supported Spanish and Italian bonds. It’s a big show of commitment to finding a solution to the debt crisis.”

The yield on Spanish 10-year bonds fell 102 basis points, or 1.02 percentage points over the week, to 5.68 percent at 5:24 p.m. in London yesterday. Two-year Spanish yields slid 152 basis points to 4.57 percent.

Italian Spread

Italian 10-year yields fell 58 basis points over the week to 6.68 percent, narrowing the yield difference over similar-maturity German bunds by 45 basis points to 4.55 percentage points.

French 10-year yields fell the most in one day since 1991 on Dec. 1 as the nation sold 4.3 billion euros of bonds due between 2017 and 2041. Spain auctioned 3.75 billion euros of securities on the same day, the maximum target, and Italy sold 7.5 billion euros of debt at yields above 7 percent level on Nov. 29.

Germany is leading a push with France for closer economic ties among euro nations allied to tougher budget rules to counter the sovereign debt crisis that is now in its third year. German Chancellor Angela Merkel said yesterday she will consult with French President Nicolas Sarkozy on Dec. 5 to coordinate their approach to a summit of European leaders on Dec. 9.

German two-year notes rose in the week, pushing yields down 16 basis points to 0.31 percent. They fell to a record low 0.277 percent on Nov. 30.

The ECB will lower interest rates by a quarter-point to 1 percent on Dec. 8, according to all but four of 52 economists in a Bloomberg News survey.

“We have two very important events next week, the European Central Bank meeting and the European leaders summit,” Cazzulani said. “There’s confidence in the market that more will be done to contain the crisis.”

Spanish government bonds have handed investors a gain of 2.6 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg, while German bunds have returned 7.2 percent. France’s debt has added 3.6 percent and Italy’s has lost 8.4 percent.

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