Italian Notes Rise After Sale; Spanish Debt Slides on Downgrade

Italian bonds advanced for a second day as the nation’s borrowing costs fell at a sale of 6 billion euros ($7.9 billion) of debt.

Spain’s bonds underperformed their Italian peers after Moody’s Investors Service cut its credit rating by two steps, amid downgrades for six European countries. Italy’s grade was lowered by one level and Moody’s revised the outlook on France’s Aaa rating to negative. German government bonds rose after data showed Greece’s economy contracted in the fourth quarter. German investor confidence surged to a 10-month high in February, a separate report showed.

“The Italian auction in particular went very well,” said John Davies, a fixed-income strategist at WestLB AG in London. “The auctions this morning went very smoothly given what we’d seen from Moody’s. These and this ZEW survey have contributed well to risk appetite overall.”

Italian two-year note yields dropped two basis points, or 0.02 percentage point, to 3.06 percent at 4:34 p.m. London time. The 2.25 percent note due November 2013 rose 0.04, or 40 euro cents per 1,000-euro face amount, to 98.70.

The Italian Treasury sold 4 billion euros of benchmark securities due November 2014 to yield 3.41 percent, down from 4.83 percent at the last auction of similar-maturity bonds on Jan. 13 and the lowest since March. It also sold a total 2 billion euros of bonds due in 2015 and 2017. The Netherlands sold five-year notes today and Spain, Greece and Belgium auctioned bills.

‘Better Situation’

With about 450 billion euros of debt to sell this year, Italy’s Prime Minister Mario Monti is taking steps to lure investors by spurring the economic growth needed to reduce the euro-region’s second biggest debt load after Greece. Ten-year yields have dropped about 2 percentage points from as high as 7.48 percent in November after Monti replaced Silvio Berlusconi. They fell three basis points to 5.57 percent today.

Italy “managed to sell the maximum target they had in mind which is a good sign,” said Annalisa Piazza, a fixed-income analyst at Newedge Group in London. “Moody’s downgrading the country was really not a factor that went against it because it probably was already priced in and people are still thinking that the government is going to make the right reforms to put the country into potential growth and a better situation.”

Italy was cut to A3 by Moody’s yesterday, which cited uncertainty over the euro region’s ability to deal with the sovereign debt crisis even as it said the new government in the country took steps to overhaul its finances. Spain was downgraded to A3 from A1 and Portugal to Ba3 from Ba2, with negative outlooks. Moody’s also lowered the ratings of Slovakia, Slovenia and Malta.

Spain-Italy Spread

“Policy makers have made steps forward but we do not think they have done enough to reassure the market that we are on a stable path,” said Alistair Wilson, chief credit officer for Europe at Moody’s in London.

Spain’s 10-year bond yield rose three basis points to 5.29 percent. The extra yield investors get to hold Italian 10-year bonds instead of Spanish securities fell six basis points to 28 basis points, the least since Nov. 22, based on closing market rates.

Portugal’s 10-year bonds snapped a five-day run of gains, with the yield climbing 11 basis points to 12.03 percent. The French 10-year yield advanced five basis points to 2.96 percent.

Investor Confidence

German bunds rose even as the ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations rose to 5.4 from minus 21.6 in January. That’s the highest since April 2011. Economists forecast a gain to minus 11.8, according to the median of 40 estimates in a Bloomberg News survey.

The German 10-year yield dropped two basis points to 1.91 percent. Two-year yields fell one basis point to 0.24 percent.

Germany’s 10-year bonds outperformed their French counterparts, with the yield spread widening by seven basis points to 105 basis points. It has increased from 86 basis points on Feb. 10, the least since Dec. 1.

Goldman Sachs Inc. said it ended a recommendation to favor Italian 10-year bonds over their French counterparts after the yield difference narrowed toward its 250-basis point target, putting the trade in line for an 8.75 percent return.

It initiated the recommendation on Jan. 8, with the Italian securities yielding 376 basis points more than the French bonds, Francesco Garzarelli, co-head of fixed-income strategy in London, wrote in a note to clients today. The spread was at 261 basis points today.

Greek Contraction

Greek two-year notes slumped as the Athens-based Hellenic Statistical Authority said gross domestic product dropped 7 percent from a year earlier in the fourth quarter after contracting a revised 5 percent on an annual basis in the third quarter. GDP declined 6.8 percent for the full year, according to Bloomberg calculations, compared with a 6 percent contraction estimated in the government’s 2012 budget.

The two-year note yield jumped almost 24 percentage points to 207.38 percent, with the price on the securities dropping to 19.47 percent of face value.

German Finance Minister Wolfgang Schaeuble said the European Union is now better prepared than two years for the possibility of a default by Greece.

“We want to do everything to help Greece,” Schaeuble said in an interview with ZDF public television yesterday. If everything fails “we’re better prepared than two years ago,” Schaeuble said in response to a question.

He spoke as euro-area finance ministers prepared to meet in Brussels tomorrow to discuss a financial rescue package.

Greek bonds have handed investors a loss of 64 percent in the past year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds returned 11 percent in the period and Italian bonds made a profit of 2 percent, the indexes show.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE