Italian, Spanish Bonds Gain as Borrowing Costs Fall at Auctions

Italian and Spanish bonds advanced this week as borrowing costs fell at debt sales amid optimism loans provided by the European Central Bank are helping to stem the spread of the region’s debt crisis.

Italian 10-year bonds gained for a third week, and Spanish two-year yields dropped to the lowest since November 2010 amid speculation banks are buying them with funds borrowed from the ECB’s longer-term refinancing operation, or LTRO. German bunds advanced this week as Greece and its creditors struggled to reach agreement over a debt-swap.

“The market is slowly turning optimistic,” said Mohit Kumar, head of European fixed-income strategy at Deutsche Bank AG in London. “To begin with, the market probably underestimated how good the three-year LTRO was. Clearly the market is realizing it is a powerful tool. It has been supporting the auctions.”

Italian 10-year yields dropped 35 basis points this week to 5.9 percent at 5 p.m. London time yesterday. The 5 percent security due in March 2022 gained 2.44, or 24.40 euros per 1,000-euro ($1,318) face amount, to 93.855.

The extra yield investors demand to hold the securities instead of bunds slid 28 basis points to 4.04 percentage points, its fourth weekly drop.

Spain’s two-year yield slid 79 basis points this week to 2.53 percent after dropping to 2.52 percent, the lowest level since Nov. 5, 2010. The yield has dropped 82 basis points since Dec. 20, the day before the ECB lent European financial institutions 489 billion euros of three-year loans.

Bond Returns

German bunds gained this week as Greece’s creditors, led by the Institute of International Finance, pursued talks with the government on a debt swap to lower the nation’s borrowings and avert economic collapse.

The 10-year yield fell seven basis points to 1.86 percent.

Italian debt has returned 5 percent this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds gained 1.3 percent this year and bunds have handed investors a loss of 0.4 percent.

Auctions next week “will be a good gauge of appetite for the peripheral bonds,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh.

Italy will sell bonds due between 2016 and 2022 on Jan. 30. France auctions bills on Jan. 30, and will offer bonds maturing 2018, 2020 and 2022 on Feb. 2. Germany plans to sell 5 billion euros of 10-year bunds on Feb. 1.