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Italian Bonds Fall Amid Greece Talks; Bunds Drop on U.S. Jobs

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Feb. 3 (Bloomberg) -- Italian and Spanish government bonds fell as Greece struggled to reach accords with European officials and its creditors to avoid a default next month, sapping demand for the region’s higher-yielding assets.

German bonds fell, posting a weekly decline, as U.S. employment climbed more than economists forecast in January and the jobless rate slipped to the lowest in three years. Italian 10-year yields rose from the least since October after a report showed the country’s services sector contracted more than estimated. The French-German 10-year yield difference dropped below 100 basis points for the first time in almost two months.

“There’s an element of caution out here with regards to Greece,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “The Italian data was very poor and the underlying picture is that the non-core economies are in a pretty dire state.”

Italy’s 10-year bond yield rose nine basis points, or 0.09 percentage point, to 5.70 percent at 4:35 p.m. London time, after falling to 5.54 percent, the lowest since Oct. 10. The 5 percent security due March 2022 dropped 0.665, or 6.65 euros per 1,000-euro ($1,311) face amount, to 95.305. Spain’s 10-year yield rose six basis points to 4.99 percent.

Greece is trying to forge on a rescue plan that will include a loss of more than 70 percent for bondholders in a voluntary debt exchange and loans that may exceed the 130 billion euros now on the table. Prime Minister Lucas Papademos said the country is in the final stretch of negotiations for a second program that will place the economy on a sounder footing.

Greek Notes

The country’s notes due August 2013 yielded 190.37 percent, from 179.20 percent yesterday and 171.28 percent a week ago. That left the price at 20.75 percent of face value. Rates on the bond maturing in October 2022 fell 18 basis points to 34.19 percent.

An index based on a survey of Italian purchasing managers in services was at 44.8 in January from 44.5 in December, Markit Economics said in a report today. Analysts estimated it would rise to 45.4. A reading above 50 indicates expansion.

Germany’s 10-year yield climbed nine basis points to 1.94 percent, after falling to 1.82 percent. That left the yield eight basis points higher since Jan. 27. French 10-year yields were little changed at 2.90 percent.

The spread between the securities narrowed nine basis points to 97 basis points, the first time it has dropped below 100 basis points since Dec. 6. France’s 10-year yield slipped 13 basis points yesterday as borrowing costs declined at a sale of benchmark 10-year debt.

French Sale

The nation sold 5.698 billion euros of bonds at an average yield of 3.13 percent, compared with 3.29 percent at the previous auction on Jan. 5.

“The auctions this week helped to bolster confidence and there’s a lot of interest in French bonds,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate and Investment Bank in London.

French bonds have handed investors a return of 1.4 percent this year, after gaining 4.5 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian government debt securities have made 8.1 percent this year, while their Spanish counterparts earned 2.7 percent.

Services, Manufacturing

Spanish and Italian bonds have rallied since the European Central Bank offered unlimited three-year cash to the region’s financial institutions in December to avoid a credit crunch. The securities have advanced amid speculation banks are buying them to use as collateral with the ECB under the program, known as the longer-term refinancing operation. The central bank will offer another set of the loans this month.

Bunds also fell as data showed Germany and France led growth in European services and factory output, fueling optimism the bigger economies can withstand the debt crisis.

A euro-area composite index based on a survey of purchasing managers in both industries rose to 50.4 from 48.3 in December, London-based Markit Economics said in a report today. January’s reading is unchanged from an initial estimate on Jan. 24. A reading above 50 indicates expansion.

The 243,000 increase in American payrolls was the most since April and exceeded all estimates in a Bloomberg survey, Labor Department figures showed in Washington. The unemployment rate dropped to 8.3 percent, the lowest since February 2009.

Volatility on Portuguese debt was the highest in euro-area markets today, followed by Finland, according to measures of 10-year bonds, two- and 10-year spreads and credit-default swaps. The yield on Portugal’s securities due April 2021 dropped for a fourth day, declining by 94 basis points to 13.87 percent. Finland’s 10-year yield rose nine basis points to 2.37 percent.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at; Emma Charlton in London at

To contact the editor responsible for this story: Daniel Tilles at

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