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Spanish, Italian Bonds Fall on Europe Output, China Growth Goal

Spain’s bonds fell for a second day after a report showed European services and manufacturing output shrank more than analysts estimated, underlining the fragility of the region’s economy.

Italian 10-year bonds snapped six days of gains after European Central Bank governing council member Jens Weidmann said he wants to tighten rules on collateral the central bank will accept in return for its loans and as China cut its growth forecast. Two-year Spanish note yields advanced as the cost of insuring against default on European sovereign debt rose to the highest in almost seven weeks amid concern Greece will struggle to settle a bond swap to prevent it from defaulting on its debt.

“The factoring in of an increase in growth is yet to come in the European market and we need to clear up a lot of uncertainty first,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “There are still other sources of uncertainty in the periphery and that’s going to keep core markets well supported,” he said.

Spain’s 10-year bond yield climbed six basis points, or 0.06 percentage point, to 4.97 percent at 4:23 p.m. London time. The 5.85 percent bond due January 2022 fell 0.505, or 5.05 euros per 1,000-euro ($1,317) face amount, to 106.75. Two-year yields rose six basis points to 2.31 percent.

Purchasing Managers

A euro-area composite index based on a survey of purchasing managers in both industries dropped to 49.3 in February from 50.4 the previous month, London-based Markit Economics said. That’s below an initial figure of 49.7 published on Feb. 22. A reading less than 50 indicates contraction. Euro-area retail sales unexpectedly rose in January, according to a separate report from the European Union’s statistics office.

China pared its economic growth target to 7.5 percent from an 8 percent goal in place since 2005 today.

Italy’s 10-year yield was three basis points higher at 4.93 percent after declining more than 2 percentage points over the past eight weeks.

The Frankfurt-based ECB will keep its benchmark interest rate at a record low 1 percent to support the economy at its March 8 meeting, according to a Bloomberg survey.

‘Substantial Risks’

Spain’s 10-year rate has fallen more than 80 basis points and the Italian two-year note yield has tumbled more than 4 percentage points since the ECB announced its plan to offer unlimited loans for three years on Dec. 8. Banks have taken more than 1 trillion euros in two operations since then.

Weidmann, who heads Germany’s Bundesbank, said euro-area central banks are taking “substantial risks” onto their balance sheets and the loans given by the ECB under its longer-term refinancing operations are at the “limits” of the euro system’s mandate.

The loan conditions have become “very generous,” Spiegel magazine quoted Weidmann as saying. “The program has a calming effect in the short term, but it’s a calm that could be deceptive,” he said, according to the magazine.

The German 10-year bund yield advanced two basis points to 1.82 percent after falling to 1.77 percent, the lowest since Jan. 18.

Spain defied its EU allies last week by raising its deficit target for this year, announcing a new estimate of 5.8 percent of gross domestic product compared with the previously agreed 4.4 percent. Spain overshot last year’s deficit target by 2.5 percentage points.

Commission Waits

The European Commission will wait until it has the “full picture” on Spain’s 2011 deficit and 2012 budget plans in April before making a judgment on the nation’s compliance with European rules, spokesman Amadeu Altafaj said today.

“The LTRO is now done, so it’s not really going to be a big story anymore and the markets will refocus on all the bits and pieces that could throw spanners in the works and the situation in Spain is just one of them,” said Elwin de Groot, a market economist at Rabobank Nederland in Utrecht. “We will see more of these types of stories because Spain is not the only country struggling with a budget deficit target that has exceeded estimates.”

France’s two-year yields rose two basis points to 0.50 percent. The nation sold 8.5 billion euros of 91-, 182- and 364-day bills today.

The Netherlands sold 1.09 billion euros of 205-day bills at an average yield of 0.032 percent. Investors bid for 3.34 times the number of securities allotted.

Portuguese Volatility

German bonds have returned 0.3 percent this year, after gaining 9.7 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French securities rose 2.3 percent in 2012 and Spanish bonds returned 3.5 percent, the indexes show.

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

The yield on Greece’s 10-year bonds declined 56 basis points to 36.54 percent. The price rose to 19 percent of face value, from 18.63 percent last week.

The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments jumped 4.5 basis points to 349.5, the highest since Jan. 18, according to BNP Paribas SA. It now costs $7.6 million in advance and $100,000 annually to insure $10 million of Greek debt for five years, signaling a 98 percent chance of default in that time, according to CMA.

Investors have until March 8 to agree to so-called private-sector involvement aimed at cutting the nation’s debt load by more than 100 billion euros and avoid default. There’s growing concern not enough bondholders will take part in the swap, causing Greece to use collective action clauses to enforce losses on all investors.

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