Europe Bonds in Biggest Rally Since Euro Start: Chart of the Day

Euro-area government bonds had their best month on record in December as Spanish and Italian debt surged in response to unprecedented action from the European Central Bank and political leaders to stem the debt crisis.

The CHART OF THE DAY shows an index of euro-zone securities rebounded from an almost 2 1/2-year low on Nov. 25, climbing 3.9 percent last month, the most since the single currency began in 1999, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Spanish bonds handed investors 6.9 percent in December, Belgian debt returned 6.4 percent and Italian securities added 5 percent. A European benchmark stock index closed at a five-month high yesterday.

The European bond market turned around in November after Italian Prime Minister Silvio Berlusconi stepped down to make way for a technocrat government led by former European Union Competition Commissioner Mario Monti, and speculation grew that greater financial assistance would be available for indebted countries that sign up to tougher budget rules. Investors also bet the ECB would act to bring down record Italian and Spanish bond yields, reached earlier that month. The central bank agreed to lend banks 489 billion euros ($638 billion) of three-year money on Dec. 21 in an unprecedented move to ease the crisis.

“The good news in Europe was the ECB’s longer-term refinancing operation, which was very successful,” said Vincent Chaigneau, global head of interest-rate strategy at Societe Generale SA in Paris. “Certainly it contributed to the compression of euro-bond spreads and we saw a recovery of risk sentiment across the board.”

The average yield of euro-region government bonds fell to 3.21 percent on Dec. 30 from 4.28 percent on Nov. 25, according to indexes compiled by Bank of America Merrill Lynch. The year-end yield was the lowest since Oct. 11 and compares with an average for the year of 3.45 percent, the data show.

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