Italian Bonds Rise on EU Fiscal Deal; Portuguese Securities Jump

Italy’s bonds led gains by the securities of Europe’s most-indebted nations after European Union leaders signed a fiscal-discipline treaty, fueling optimism a solution to the debt crisis is getting nearer.

German 10-year bund yields climbed from the lowest in almost two weeks after Greek Prime Minister Lucas Papademos said he was committed to concluding debt-swap talks with the nation’s creditors, reducing demand for safer securities. Portuguese 10-year yields dropped more than a percentage point after surging to a euro-era record yesterday. Belgium’s two-year notes rose even as the country’s borrowing costs climbed at a bill sale.

“The deal that they did on the fiscal rules was good and that is supporting risk sentiment today,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “What’s been decided won’t help with the current crisis, but will prevent future crises, so it might have a positive short-term impact.”

Italy’s 10-year yield fell 12 basis points, or 0.12 percentage point, to 5.97 percent at 4:18 p.m. London time. The 5 percent bond due March 2022 gained 0.805, or 8.05 euros per 1,000-euro ($1,315) face amount, to 93.29.

The extra yield investors demand to hold the securities instead of their German counterparts shrank 12 basis points to 4.18 percentage points. The spread has contracted from a record 5.75 percentage points on Nov. 9.

Spanish 10-year yields dropped six basis points to 4.98 percent, narrowing the spread over German bunds by six basis points to 3.19 percentage points.

‘Strongly Committed’

EU leaders signed off on key measures of the strategy to end the financial crisis at a summit in Brussels late yesterday. They agreed to accelerate the setup of a permanent 500 billion-euro rescue fund and endorsed a German-inspired deficit-control treaty. Papademos told reporters after the meeting he is “strongly committed” to reaching an agreement with creditors.

German 10-year bonds dropped for the first time in five days, with yields rising one basis point to 1.80 percent. They are little changed this month.

Spanish bonds advanced before the government holds a note auction on Feb. 2. The country will sell debt maturing in July 2015, October 2016 and January 2017.

“Markets are already focusing on the Spanish auctions on Thursday,” said Peter Schaffrik, head of European interest-rate strategy at RBC Capital Markets in London. “The hurdle for Spain is relatively high, but the domestic banks are eager to buy the paper.”

Portuguese Bonds

Portugal’s 10-year yield dropped 117 basis points to 16.23 percent, after climbing to 18.29 percent, the highest in the euro era. The price rose 2.69 to 42.58 percent of face value.

The nation’s bonds tumbled yesterday amid speculation investors will have to take losses on their holdings in the event of a Greek debt deal.

Volatility on Portuguese sovereign debt was the highest in euro-area markets today, followed by France and Finland, according to measures of 10-year bonds, two- and 10-year spreads and credit-default swaps.

Belgian notes declined after the nation sold 2.58 billion euros of bills, less than the 3 billion euros it had planned.

The treasury auctioned 1.64 billion euros of three-month bills at a weighted average yield of 0.506 percent, versus 0.429 percent in the most recent sale two weeks ago. Demand rose to 2.7 times the amount issued, from 2.24 times on Jan. 17.

Belgian two-year yields fell four basis points to 1.51 after dropping to 1.48 percent, the lowest since November 2010.

Monthly Return

Italian bonds have returned 4.9 percent this month, after dropping 5.7 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portuguese bonds slid 16 percent in January, while Greek securities declined 1.4 percent.

Demand for Spanish and Italian bonds has been bolstered after the European Central Bank said on Dec. 8 it would offer unlimited three-year cash to the region’s financial institutions to stimulate lending. Spain’s two-year yields have dropped more than 2 percentage points since then amid speculation banks are buying the securities to use as collateral with the ECB.

Banks may ask for as much as twice the 489 billion euros the central bank supplied last month at the next refinancing operation in February, the Financial Times reported today, citing some of area’s biggest lenders, without naming them.

Finnish bonds underperformed their German counterparts as the country said it planned to sell new 15-year bonds. The extra yield investors get for holding Finland’s 10-year debt instead of bunds widened four basis points to 48 basis points.

The country’s 10-year yield increased four basis points to 2.27 percent.

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