Spanish, Italian Bonds Rise on Greece Deal Optimism; Bunds Drop

Spanish and Italian bonds rose for a second day amid speculation European officials are closing in on an agreement to grant a second bailout to Greece, fueling optimism the region’s debt crisis will be contained.

Italy’s 10-year securities rose for a sixth week, the longest run since August 2006, as Prime Minister Mario Monti, German Chancellor Angela Merkel and Greek Prime Minister Lucas Papademos expressed optimism an agreement on Greece can be reached when euro-area finance ministers meet next week. German bunds declined for a second day as signs of progress on Greece damped demand for the region’s safest assets.

“The market seems to be trying to get itself into a better place in terms of anticipating some good news” on Greece, said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “The periphery is marginally more positive, Spain is recovering.”

The Spanish 10-year yield dropped seven basis points, or 0.07 percentage point, to 5.25 percent at 4:32 p.m. London time after falling 11 basis points yesterday. The 5.85 percent bond due in January 2022 rose 0.575, or 5.75 euros per 1,000-euro ($1,315) face amount, to 104.515.

Italy’s 10-year yield declined eight basis points to 5.58 percent, meaning it has dropped three basis points this week. The extra yield investors demand to hold the securities instead of German bunds shrank 11 basis points to 365 basis points.

Approval Likely

Merkel, Monti and Papademos discussed efforts to obtain a second bailout for Greece and are confident euro-area finance ministers will “find a solution for open questions” on Feb. 20, Steffen Seibert, Merkel’s chief spokesman, said in a statement. The three leaders held a conference call today, Seibert said.

As long as Greece meets conditions for the aid, the finance ministers gathering in Brussels will probably approve the rescue package along with a planned debt exchange, three German officials involved in a telephone briefing by government officials said.

“We own Italy, it’s a name we like quite a bit,” said Rick Rieder, chief investment officer for fundamental fixed-income portfolios at BlackRock Inc., speaking in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “You’re talking about a very different dynamic than the rest of the peripherals. It’s a big country, big exports, wealthy nation.” New York-based BlackRock is the world’s biggest money manager.

German Bunds

The German 10-year yield rose three basis points 1.93 percent. The yield dropped to a record 1.636 percent on Sept. 23 as the region’s debt crisis escalated.

“Bunds are likely to tread water around current levels with risk appetite in general stabilizing as all eyes turn toward Monday’s apparently crucial eurogroup meeting,” Sercan Eraslan, a fixed-income strategist at WestLB AG in Dusseldorf, wrote in an e-mailed note.

Greece will submit legislation to parliament on Feb. 21 to allow collective action clauses that may force bondholders resisting a debt swap to take part, Naftemporiki reported, without citing anyone. The debt-swap process will start on Feb. 22 and conclude on March 9, the Athens-based newspaper reported.

The yield on the Greek 2022 bond climbed 99 basis points to 34.37 percent, with the price falling 0.78 to 20.52 percent of face value.

The 4.3 percent note due next month declined 5.26 to 36.74 percent of face amount. Without completing a debt swap, Greece would need to pay 14.5 billion euros within a week of the March 20 redemption or trigger a sovereign default.

Volatility on Greek debt was the highest in euro-area markets followed by Portugal, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. The change in the spread was 6.9 times the 90-day average.

German bunds have handed investors a loss of 0.4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek bonds lost 4.6 percent, and Italian securities returned 8.2 percent.

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