Spanish, Italian Bonds Gain as Ministers Increase Bailout Fund

Spanish and Italian bonds led gains among Europe’s higher-yielding government securities as euro-area finance ministers agreed to increase the region’s bailout fund to help contain the debt crisis.

Italian securities extended a quarterly gain as ministers put the total size of the firewall at 800 billion euros ($1.07 trillion), including bailouts already given to Greece, Ireland and Portugal. Spanish bonds rose the most in a week as the cabinet passed its budget a day after workers went on strike over changes to labor rules. German bunds were little changed.

“Near-term event risk is out of the way, supporting Spanish and Italian bonds,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “It’s good for risk sentiment that euro-zone ministers reached agreement on the size of the firewall. The Spanish budget was much as expected. It’s a case of looking at the details and the implementation risk.”

Spain’s 10-year yield fell 12 basis points, or 0.12 percentage point, to 5.35 percent at 4:42 p.m. London time, the biggest decline since March 23. The 5.85 percent bond due in January 2022 rose 0.935, or 9.35 euros per 1,000-euro face amount, to 103.815.

The Italian 10-year yield declined nine basis points to 5.12 percent, down from 7.11 percent at the end of last year.

European governments capped fresh rescue lending at 500 billion euros, bringing the size of the firewall to 800 billion euros, according to a statement after a meeting in Copenhagen today. The finance ministers ruled out using the 240 billion euros left in the temporary rescue fund to go beyond that.

Sum ‘Important’

“This sum is important,” Austrian Finance Minister Maria Fekter said. “Considering the involvement of the International Monetary Fund as well as the discussions at the G-20, joint participation depends on what Europe does -- and Europe has now fixed this sum clearly.”

Finance ministers also agreed to get the European Stability Mechanism up to full capacity by mid-2014, two years earlier than previously planned. Governments will pay in two installments of capital this year, two more in 2013 and the final tranche in the first half of 2014.

Spain’s two-year note yield dropped eight basis points to 2.52 percent, while Italy’s two-year rate declined eight basis points to 2.9 percent.

Spain Budget

Spanish bonds also rallied after the government of Prime Minister Mariano Rajoy said it will raise corporate taxes and reduce public spending as it seeks to make good on a pledge to trim the deficit by more than a third this year.

“We are in a critical situation that has forced us to respond with the most austere budget of the Spanish democracy,” Budget Minister Cristobal Montoro said.

The extra yield or spread investors demand to hold 10-year Spanish bonds instead of comparable German debt narrowed 11 basis points to 355 basis points.

Germany’s 10-year bund yield declined one basis point to 1.8 percent after dropping to 1.79 percent, the lowest level since March 13.

Technical Analysis

Ten-year bund yields may decline toward 1.74 percent after breaking below a key level of support, according to data compiled by Bloomberg. Ten-year yields are extending the breach of the 50-day moving average at 1.89 percent, the data show.

German two-year yields are poised to drop to 0.145 percent, the March 8 low, after falling below the 50-day moving average at 0.223 percent. Support is expected at 0.19 percent, the March 13 high, according to the data. They were little changed today at 0.21 percent.

Italian bonds have returned 10 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portuguese bonds gained 14 percent, the most of 26 sovereign markets tracked by the indexes. Bunds have risen 0.2 percent.

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

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