German Bonds Decline Before Italy Auctions $7.8 Billion o

German bunds fell, driving up yields by the most in three months, after Federal Reserve policy makers raised their assessment of the U.S. economy, damping demand for the euro-region’s safest assets.

German 10-year bunds underperformed all their euro-region peers, with yields on Europe’s benchmark securities rising to the highest in almost three weeks. Italy’s bonds rose as the nation’s three-year borrowing costs fell to a 17-month low at a debt sale today. Greek debt advanced after the nation’s credit grade was raised by Fitch Ratings.

“Bunds traded lower as the market’s taken heart from the Fed statement,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “It was sufficient to give the market the confidence it needed.”

The German 10-year yield climbed 14 basis points to 1.96 percent at 4:44 p.m. London time, the highest rate since Feb. 22. The 2 percent bond due January 2022 dropped 1.215, or 12.15 euros per 1,000-euro ($1,303) face amount, to 100.375.

German 10-year rates may rise toward 2 percent, Wand said. “Two percent to 2.05 percent is the upper end of the yield range, so that will be key” to near-term direction, he said.

Volatility in German debt was the second highest in euro-area markets today, after Dutch securities, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. Two-year German yields increased six basis points, or 0.06 percentage point, to 0.24 percent.

Bonds Slump

Bonds slumped from Germany to the U.S. after Fed policy makers said yesterday they expect “moderate economic growth,” rather than the “modest” expansion they described in their previous statement. Unemployment will “decline gradually” and the inflation outlook is “subdued,” the Federal Open Market Committee said.

The yield on benchmark 10-year U.S Treasuries advanced as much as 12 basis points today to 2.25 percent, the highest since Oct. 31. U.K. 10-year gilt yields reached 2.35 percent, the highest since Dec. 6.

Italy sold 5 billion euros of 2.5 percent notes due March 2015, with borrowing costs falling to 2.76 percent, the lowest since October 2010. Demand was 1.56 times the amount sold, compared with 1.40 times last month. The Rome-based Treasury also sold 1 billion euros of seven-year bonds at 4.3 percent, meeting the 6 billion-euro maximum set for the sale.

Italian Rally

“Italy has rallied in the first quarter,” said Peter Goves, a fixed-income strategist at Citigroup Inc. in London. “It’s difficult to see a significant negative driver in the peripheral bond markets in the immediate term,”

The Italian 10-year bond yield fell four basis points to 4.86 percent, reducing the extra yield investors get for holding the securities instead of benchmark German bunds by 18 basis points to 2.9 percentage points. The Spanish-German yield spread narrowed nine basis points to 322 basis points.

Goldman Sachs Group Inc. advised investors to buy five-year Italian notes against their Spanish equivalents.

“There is still value in euro-area peripheral bond markets,” Francesco Garzarelli, co-head of fixed-income strategy in London, wrote in an e-mailed report today. “Italy should continue to outperform Spain.”

Investors should bet that Italian five-year note yields fall to 50 basis points below their Spanish equivalents, Garzarelli said. They should end the trade if the note yield climbs to 25 basis points more than Spanish rates. The difference, or spread, was at 19 basis points today.

Spanish Sale

Spain is scheduled to sell securities maturing in 2015, 2016 and 2018 tomorrow, while France plans to auction notes due in April 2014 and October 2014, as well as bonds maturing in February 2016 and February 2017.

Greek government bonds due in February 2023 advanced after Fitch said the nation’s debt swap will reduce the risk of the country reneging on its obligations. The nation was raised four levels to B- from restricted default and given a stable outlook.

The yield on the 2023 securities fell 74 basis points to 18.28 percent. The rate on the nation’s bond maturing in February 2042 was little changed at 14.21 percent.

German bunds are little changed this year after returning 9.7 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds have advanced 13 percent since Dec. 31, while Spanish debt returned 2.2 percent, the data show.

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