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Italian, Spanish Bonds Fall as Moody’s Plans Review; Bunds Gain

Italian and Spanish bonds led declines in Europe’s higher-yielding sovereign debt after Moody’s Investors Service said measures agreed at last week’s leaders’ summit don’t go far enough to stem the crisis.

German and Dutch two-year yields fell to euro-era records as investors sought safer assets after Bundesbank President Jens Weidmann said the onus is on governments rather than the European Central Bank to resolve the crisis. Italy’s two-year notes erased losses as the ECB was said to buy the nation’s securities and borrowing costs declined at a sale of one-year bills. Treasuries advanced and the euro weakened.

“Italian and Spanish bonds are falling because of the bigger euro-region picture,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit Global Research in Milan. “The summit didn’t do enough to turn around market expectations about the European Central Bank taking a bigger role to solve the crisis. The Italian auction results were fairly good.”

Italian 10-year yields climbed 18 basis points, or 0.18 percentage point, to 6.54 percent at 4:20 p.m. London time. The 4.75 percent bond due in September 2021 fell 1.170, or 11.70 euros per 1,000-euro ($1,321) face amount to 87.935. Two-year note yields dropped two basis points to 5.93 percent, after gaining as much as 53 basis points.

Spanish 10-year rates rose four basis points to 5.78 percent, after earlier climbing above 6 percent for the first time since Dec. 1.

Risk of Revisions

European leaders unveiled a blueprint after meetings on Dec. 8 and 9 for a closer fiscal accord to save the euro, adding 200 billion euros to their bailout fund and tightening rules to curb future debts. They also agreed to start a 500 billion-euro rescue fund next year.

The agreement offered few new measures and doesn’t diminish the risk of credit-ranking revisions, Moody’s said in its Weekly Credit Outlook. “In the absence of any decisive policy initiatives that stabilize credit-market conditions effectively, our intention as announced in November is to revisit the level and dispersion of ratings during the first quarter of 2012,” the company said.

Ten-year German yields fell 11 basis points to 2.04 percent. The two-year rate dropped six basis points to 0.265 percent, after declining to a record 0.25 percent. Dutch two-year yields reached a euro-era low 0.356 percent.

‘Too Many Issues’

“There’s an element of flight to quality in the market,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “The analysis of the euro-region summit is that it simply isn’t enough and there are far too many issues to be clarified, so bunds are well bid.”

The Stoxx Europe 600 Index dropped 1.7 percent and the Standard & Poor’s 500 Index fell 1.7 percent. The euro declined as much as 1.3 percent to a two-month low of $1.3209. The 10-year Treasury yield slid five basis points to 2.01 percent.

German bunds gained for the fourth time in five days as Weidmann damped speculation the ECB will extend its role to help end the debt crisis. While the agreement on Dec. 9 to limit budget deficits represents “progress,” governments rather than the ECB should resolve the crisis with financial backing, he told the Frankfurter Allgemeine Sonntagszeitung.

Italian Auction

Italian notes reversed losses as people with knowledge of the transactions said the ECB bought the securities along with Irish debt. The people declined to be identified because the trades are confidential. A spokeswoman for the ECB in Frankfurt declined to comment.

Yields on Ireland’s 5 percent bond due in October 2020 climbed 10 basis points to 8.82 percent.

The ECB said it settled 635 million euros of bond purchases in the week through Dec. 9, down from 3.7 billion euros the previous week. The central bank will take seven-day term deposits tomorrow to absorb the 207.5 billion euros of liquidity created since its bond program started on May 10 last year to ensure the purchases don’t fuel inflation.

Italy sold 7 billion euros of 12-month Treasury bills at an average yield of 5.952 percent, compared with 6.087 percent at the previous auction of the securities on Nov. 10. Demand from investors declined to 1.92 times the amount on offer from 1.99.

The Netherlands sold 1.12 billion euros of bills due March 2012 at a yield of minus 0.007 percent, the Dutch State Treasury Agency said.

France, Austria

French 10-year bonds stayed lower as the nation sold 4 billion euros of 13-week bills at an average yield of 0.222 percent. The nation also auctioned 308-day bills and 182-day bills. Ten-year yields climbed two basis points to 3.29 percent.

Greece is scheduled to sell 1.25 billion euros of six-month bills tomorrow, and Spain plans to offer 12- and 18-month debt.

The extra yield investors demand to hold French and Austrian 10-year bonds instead of Germany’s widened on concern Standard & Poor’s will cut the two nations’ top credit ratings.

S&P said Dec. 5 that 15 euro nations face having their rankings lowered as “continuing disagreements” among policy makers on how to tackle the debt crisis risks damaging their financial stability.

The spread between French and German 10-year yields widened 13 basis points to 125 basis points. The gap between similar-maturity Austrian securities and German bunds expanded five basis points to 112 basis points.

German bonds have returned 7.6 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Italian debt lost 7 percent and French securities gained 3.3 percent, the indexes show.

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