Italian, Spanish Notes Rise as ECB Loans Seen Spurring Demand

Italian Government Bonds Rise Before Sale
A pedestrian passes Italy's Stock Exchange in the Piazza Affari in Milan. Photographer: Gianluca Colla/Bloomberg

Italian two-year notes rose for a third day and Spanish securities rallied on speculation the European Central Bank’s provision of three-year loans is boosting demand for the two nations’ debt.

Five-year Italian notes gained for the first time in five days as borrowing costs declined and demand increased at a sale of six-month bills. The nation plans to auction as much as 8.5 billion euros ($11 billion) of debt tomorrow. German and Dutch two-year yields fell to records and overnight deposits with the ECB climbed to an all-time high after the central bank lent financial institutions 489 billion euros at a tender on Dec. 21.

“There’s a switch thanks to the ECB three-year tender, which is helpful” for shorter-maturity debt in nations such as Italy and Spain, said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “The next stop is tomorrow’s bond auction and today’s result is a good omen for that.”

Italy’s two-year yield fell nine basis points, or 0.09 percentage point, to 4.98 percent at 4:39 p.m. London time. The 2.25 percent note due in November 2013 rose 0.165, or 1.65 euros per 1,000-euro face amount, to 95.375. The five-year yield slid 11 basis points to 6.23 percent. The 10-year yield was little changed at 7 percent.

Spanish two-year rates dropped 32 basis points to 3.31 percent. Ten-year yields fell 18 basis points to 5.15 percent.

Volatility on Spanish debt was the third highest among 24 nations tracked by Bloomberg, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Italian Sale

The Italian Treasury sold 9 billion euros of 179-day bills at a rate of 3.251 percent, down from 6.504 percent at the previous auction on Nov. 25. Demand was 1.7 times the amount on offer, compared with 1.5 times last month. The nation also sold zero-coupon notes due in September 2013 at a yield of 4.85 percent, versus 7.81 percent in November.

The auctions were Italy’s first since the ECB’s three-year tender, which central bank President Mario Draghi announced on Dec. 8 in an effort to keep credit flowing to the 17-nation euro economy while lawmakers tackle the sovereign debt crisis.

The loans were provided at the ECB’s benchmark rate, which the central bank lowered to 1 percent at its Dec. 8 meeting. They helped spur gains for Italian securities, which have returned 4.6 percent this month, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. They still declined 6.1 percent this year.

Maturing Debt

Italy expects to raise almost 450 billion euros from debt sales next year, enough to cover 202 billion euros of maturing bonds and finance a 23.6 billion-euro deficit, Maria Cannata, director of public debt, said in a Dec. 24 interview with newspaper Il Sole 24 Ore.

The nation is scheduled to sell securities due in 2014, 2018, 2021 and 2022 tomorrow.

German two-year yields were little changed at 0.17 percent after falling to a record 0.142 percent, the least since Bloomberg began collecting the data in 1990. One-year rates were at minus 0.05 percent. Ten-year yields declined three basis points to 1.89 percent.

Two-year Dutch yields fell to as low as 0.194 percent.

Euro-area banks deposited 452 billion euros with the Frankfurt-based ECB yesterday, the most since the common currency’s introduction in 1999 and up from the previous record of 412 billion euros a day earlier.

“There’s a flight to cash products” after the ECB tender, said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “It looks like some of it is on deposit in the ECB and some has been put into front-end core notes. It will be interesting to see if any of this is put into Italy,” he said before today’s debt sale.

The ECB’s balance sheet increased 239 billion euros to 2.73 trillion euros in the week ended Dec. 23, the central bank said today. That’s 553 billion euros more than three months ago.

German debt has returned 9.3 percent this year, according to the Bloomberg/EFFAS indexes, the most since 2008.

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