Spanish, Italian Bonds Surge on Europe Optimism; Bunds Decline

Spanish bonds rose, pushing 10-year yields down to the lowest in seven weeks, on optimism European leaders are moving closer to agreeing on a plan to contain the region’s debt crisis.

Italian 10-year yields dropped the most in almost four months after Prime Minister Mario Monti announced 30 billion euros ($40.4 billion) of measures to cut the nation’s debt load. Belgian and French securities also rallied as Germany Chancellor Angela Merkel and France’s President Nicolas Sarkozy pushed for a rewrite of the European Union’s governing treaties before a summit of European leaders on Dec. 9. Germany and the Netherlands auctioned bills at record low yields today. Greek notes declined.

“The market is betting a lot on a positive outcome at the end of the week after the leaders’ summit and that’s supporting peripheral bonds,” said Gianluca Ziglio, a London-based interest-rate strategist at UBS AG. “The Italian budget measures seem to go in the right direction, especially in terms of the size.”

Spain’s 10-year yield fell 56 basis points, or 0.56 percentage point, to 5.12 percent at 4:29 p.m. London time after dropping to 5.09 percent, the lowest since Oct. 12. The 5.5 percent bond due in April 2021 climbed 4.04, or 40.40 euros per 1,000-euro face amount, to 102.72. Two-year rates tumbled 67 basis points to 3.90 percent.

Merkel and Sarkozy are seeking to tighten European cooperation as a first step to ending the two-year old debt crisis. Sarkozy told reporters in Paris that the two nations agreed to back automatic penalties for deficit violators, a European monetary fund and monthly summit meetings. He said they aimed to reach consensus by March.

Draghi Signal

ECB President Mario Draghi signaled on Dec. 1 the central bank may do more to fight the crisis as long as governments push the euro area toward a fiscal union. Merkel won’t stand in the way of Bundesbank help to fight the debt crisis with loans channeled through the International Monetary Fund, Michael Meister, the parliamentary finance spokesman for Merkel’s Christian Democratic Union, said today.

Italy’s 10-year yield declined 72 basis points to 5.96 percent after dropping as much as 75 basis points, the most since Aug. 8 when the European Central Bank was said to begin buying the nation’s debt. Two-year yields fell 1.06 percentage points to 5.51 percent.

Monti Package

Monti’s Cabinet yesterday approved a package of austerity and growth measures to overhaul the country’s pension system, crack down on tax evasion, cut the cost of government and provide incentives for companies to hire young workers.

“Without this package Italy would collapse and would end up in a situation similar to that of Greece -- a country which we have a lot of sympathy for, but that we don’t want to emulate,” Monti said today at a press conference in Rome.

Spanish and Italian bonds were the most volatile among euro-area markets today, according to measures of 10-year debt, two- and 10-year yield spreads and credit-default swaps.

Ten-year Belgian yields dropped 31 basis points to 4.34 percent, and similar-maturity French rates declined 14 basis points to 3.13 percent.

German bunds fell for the first time in four days as stock gains damped demand for safer assets. The 10-year yield climbed six basis points to 2.20 percent.

The Stoxx Europe 600 Index of shares advanced 1 percent, and the euro strengthened 0.5 percent to $1.3461.

ECB Meeting

The ECB will lower interest rates by a quarter point to 1 percent at its next policy meeting on Dec. 8, according to 52 of 57 economists in a Bloomberg News survey. The central bank currently offers unlimited funding to euro-area banks against eligible collateral.

“I expect the ECB to cut by 25 basis points and possibly add further liquidity supporting measures,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “The extra liquidity measures would support risky assets and cause sovereign-credit spreads to tighten.” The measures would support “the shorter end of the sovereign-credit curves, from Italy and Spain to Belgium and France,” he said.

French two-year rates fell 17 basis points to 1.07 percent, reducing the extra yield investors demand to hold the securities instead of German notes by 21 basis points to 73 basis points.

German Auction

Germany sold 2.68 billion euros of six-month bills today at a yield of 0.0005 percent. The Netherlands auctioned 1 billion euros of three-month securities at a yield of minus 0.004 percent, the first time it has issued the debt with a negative yield since Bloomberg began collecting the data in 2000. France also sold bills today.

Greek two-year yields climbed to a record after Finance Minister Evangelos Venizelos said 100 percent participation is needed in a voluntary debt-swap agreement to achieve a 100 billion-euro reduction in the country’s debt. Greek banks may need as much as 40 billion euros in fresh capital, he said.

Forgiving Greece a portion of its debt was a “terrible mistake,” ECB council member Athanasios Orphanides said in Nicosia, Cyprus. “This is why the yields of European bonds are so high,” he said.

The Greek two-year yield climbed 3.93 percentage points to 137.78 percent after rising to a record 139.89 percent. The price fell to less than 25 percent of face value. The rate on securities due in October 2022 climbed to 32.40 percent, with the price dropping to 21.99 percent of face value.

Italian bonds have lost 8.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German debt advanced 7.4 percent, the indexes show.