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Italian Yields Fall Below 6% for 1st Time in 7 Weeks; Bunds Gain

Italian bonds rose, pushing 10-year yields below 6 percent for the first time in seven weeks, after the nation sold its maximum target at an auction of zero-coupon and inflation-linked debt.

German bunds gained for a second day after the U.S. Federal Reserve signaled it is moving toward increasing bond purchases to cap borrowing costs, spurring bets other nations will follow. Greek two-year yields climbed above 200 percent amid speculation private-sector creditors are willing to accept a lower coupon in a debt swap. The extra yield, or spread, investors demand to hold Italian and Spanish 10-year bonds instead of bunds shrank.

“Italy’s spread is tightening -- the auction went well,” said Alessandro Mercuri, an interest-rate strategist at Lloyds Bank Corporate Markets in London. “It seems that Italy is being taken out of the picture, and now people are waiting for news out of Athens. Bund yields are coming lower even in a risk-on environment because they are still absorbing the Fed shock.”

Italy’s 10-year yield fell 18 basis points, or 0.18 percentage point, to 6.05 percent at 5 p.m. London time after falling to 5.99 percent, the lowest since Dec. 8. The 5 percent bond due in March 2022 rose 1.24, or 12.40 euros per 1,000-euro ($1,316) face amount, to 92.775.

The difference in yield with German bunds shrank 11 basis points to 418 basis points. The spread has contracted from a euro-era record 575 basis points on Nov. 9

‘Very Positive’

Italy sold 4.5 billion euros of zero-coupon notes maturing in 2014 at a yield of 3.763 percent, down from 4.853 percent for similar-maturity debt sold on Dec. 28. The Treasury priced 500 million euros of inflation-linked bonds due 2014 to yield 3.2 percent. Investors bid for 1.71 times the zero-coupon debt offered, versus 2.24 times last month.

“We regard today’s Italian auction result as very positive,” said Chiara Cremonesi, a fixed-income strategist at UniCredit Research in London. “The abundant liquidity in the system, and even more importantly the improvement in market sentiment over the last few weeks, were supportive factors.”

Spanish 10-year yields fell 19 basis points to 5.21 percent, narrowing the spread over bunds by 11 basis points to 334 basis points.

German 10-year yields declined seven basis points to 1.88 percent after falling five basis points yesterday.

Representatives of Greece’s private creditors will propose that bonds issued as part of a debt exchange should carry a weighted average coupon of 3.75 percent, Kathimerini reported, without saying how it got the information.

Greek Meeting

Charles Dallara, the managing director of the Washington-based Institute of International Finance, will make the proposal when talks with Greek officials resume in Athens today, the newspaper said.

Greek two-year notes dropped, with the price falling to 19.28 percent of face value and the yield climbing 28.37 percentage points to 200.14 percent.

Volatility on Portuguese debt was the highest in euro-area markets today followed by Greece, according to measures of 10-year bonds, the spread between two- and 10-year yields, and credit-default swaps. The change in yield was 3.7 times the 90-day average.

“The attention of the pessimists is moving from Greece to the Portuguese bond market,” Lloyds’ Mercuri said.

Portuguese debt pared declines as the European Central Bank was said to buy the nation’s securities, according to three people with knowledge of the transactions who declined to be identified because the deals are confidential.

Portugal’s two-year yield climbed 149 basis points to 16.08 percent, after rising as much as 227 basis points.

The 10-year yield rose 20 basis points to 14.8 percent. The spread over bunds widened to as much as 13.23 percentage points, the most since Bloomberg began collecting the data in 1997.

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