Italian Bonds Rise 2nd Day on Global Action Speculation

Italian bonds climbed, trimming a weekly decline, amid speculation global policy makers will take coordinated action to combat the risks from Europe’s debt crisis as Greek elections threatened to amplify market turmoil.

German bunds advanced after data showed industrial production in the U.S. unexpectedly fell in May. Greece’s bonds rose as the nation prepared for a ballot in two days that will turn on whether voters accept austerity measures to stay in the euro. Spain’s bonds slid for a sixth day, and the nation’s 10-year yields headed for the biggest weekly increase since the start of the euro in 1999.

There’s “little choice left for policy makers but to act if they wish to maintain stability should the worst-case scenario of a Greek exit from the euro materialize and funding markets for Spain and Italy shut,” said Brian Barry, an analyst at Investec Bank Plc in London.

Italy’s 10-year yield fell 17 basis points, or 0.17 percentage point, to 5.96 percent at 4:21 p.m. London time after rising to 6.34 percent yesterday, the highest since Jan. 20. The 5.5 percent bond due in September 2022 climbed 1.245, or 12.45 euros per 1,000-euro ($1,263) face amount, to 97.165. That pared the increase for the week to 19 basis points.

ECB President Mario Draghi said today there are no inflation risks in the 17-nation euro area and vowed the central bank will continue providing liquidity to solvent lenders. Bank of England Governor Mervyn King late yesterday announced a program that will allow banks to swap assets with the central bank in return for money to be loaned to companies and households.

‘Coordinated Response’

“We’ve got more fear of central bank action, with the Bank of England having prepared for their next phase of easing,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “It’s all enough to scare the markets into thinking there might be a coordinated response.”

The rate on Greece’s 2 percent bond maturing in February 2023 fell 145 basis points to 27.11 percent, with the nation’s election in two days set to provide the next flashpoint for investors as Europe’s debt crisis roils financial markets,

Spanish 10-year yields were little changed at 6.90 percent, set for a 69 basis-point increase on the week, the biggest since the common currency was established.

German 10-year yields fell four basis points to 1.45 percent, having risen 12 basis points this week. The rate reached a record low 1.127 percent on June 1.

Bunds Selloff

Bunds underperformed most of their euro-region counterparts amid concern that Germany will need to increase borrowing to support its struggling neighbors. A report today showed euro-area exports declined for a second month in April, adding to signs of weakness in the 17-nation economy.

“There’s been a significant selloff in bunds as investors have realized that Germany is going to have to come to the rescue,” said Craig Veysey, London-based head of fixed income at Principal Investment Management, part of Sanlam Group, which manages $72 billion.

“There’s going to be a huge transfer of taxpayer money going into Greece and might also have to be used to help out the likes of Spain and perhaps even Italy further down the road,” Veysey said in an interview with Mark Barton on Bloomberg Television’s “Countdown.”

Exports Drop

Exports from the common-currency bloc fell a seasonally adjusted 1.3 percent from March, when they dropped 1 percent, the European Union’s statistics office in Luxembourg said today.

U.S. output at factories, mines and utilities decreased 0.1 percent last month after a revised 1 percent gain in April, the Federal Reserve reported today in Washington. Economists forecast a 0.1 percent advance, according to the Bloomberg News survey median.

Volatility on Austrian bonds was the highest in euro-area markets, according to measures of 10-year debt, the spread between two- and 10-year securities and credit-default swaps.

German debt has handed investors a loss of 2 percent this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities have lost 1.1 percent, and Italian bonds declined 0.9 percent.

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