Italian Notes Gain on ECB Bets as Spanish Bonds Drop

Italian and Spanish notes rose on speculation European Central Bank policy makers will take steps to address the debt crisis this week after a report showed the euro area’s jobless rate surged to a record.

Spain’s two-year yield reached less than 4 percent for the first time since June 11 as its 10-year bonds declined before auctions of securities due between 2015 and 2022 on July 5. The ECB will cut its benchmark interest rate to a record 0.75 percent the same day, according to the median estimate of 61 analysts surveyed by Bloomberg News. Securities of Europe’s so-called peripheral nations outperformed benchmark German debt after regional leaders last week said they would use rescue funds to stabilize markets.

“People are not willing to go too short on Italian or Spanish bonds ahead of the ECB meeting and before we see details of measures announced last week,” said Charles Diebel, the head of market strategy at Lloyds Banking Group Plc in London. A short position is a bet the price of an asset will decline.

Italian two-year note yields fell 10 basis points to 3.40 percent at 5 p.m. London time, after reaching 3.14 percent, the lowest since May 14. The 3 percent security due April 2014 rose 0.160, or 1.60 euros per 1,000-euro ($1,259) face amount, to 99.37. The yield on Spanish securities due in April 2014 decreased seven basis points to 4.20 percent.

Track Record

The ECB has a track record of action following political progress to tackle the debt crisis, including bond purchases that followed bailout programs and unlimited three-year loans on the heels of pledges supporting fiscal discipline. Spanish and Italian bonds rallied on June 29 after political leaders said they would ease repayment rules for emergency loans to Spain’s banks and relax conditions on potential help for Italy.

The securities stayed higher today even after the Finnish government said it is opposed to purchases of bonds in the secondary market by the European Stability Mechanism, the region’s permanent bailout fund.

Dutch Prime Minister Mark Rutte also said last week that his nation was not in favor of Italy’s request for “direct bond-buying by the aid funds in the secondary markets.”

Irish bonds climbed, pushing the yield on the country’s debt due October 2020 down 12 basis points to 6.34 percent. Volatility on Belgian government debt was the highest in developed markets today, followed by Finland and Ireland, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit default swaps.

Common Debt

Spanish 10-year bonds declined before this week’s debt offerings and amid speculation that moves toward common debt issuance in Europe will face resistance from top rated countries including Germany. The yield increased five basis points to 6.38 percent.

“Market players may be demanding a concession ahead of supply on Thursday, weighing on the longer end” in Spain, said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. In Edinburgh. “There’s still some implementation risk. There was no agreement whatsoever on whether debt mutualization is a good thing.”

Spain will auction as much as 3 billion euros of bonds maturing between 2015 and 2022, the Treasury said. The maximum sales target at Spain’s last bond auction on June 21 was 2 billion euros.

Germany’s 10-year bunds rose after a report showed the jobless rate in the 17-nation euro area increased to 11.1 percent in May from 11 percent in June. That’s the highest since the data series was started in 1995.

Euro-Area Manufacturing

Markit Economics said separately its index of euro-area manufacturing based on a survey of purchasing managers was 45.1 in June, compared with an initial estimate of 44.8. Another report showed manufacturing in the U.S. contracted last month.

The bund yield fell six basis points to 1.52 percent, after dropping to a record low of 1.127 percent on June 1.

Bunds also advanced after German President Joachim Gauck withheld approval of the 500 billion-euro ESM pending lawsuits seeking to challenge the plan. Germany’s 10-year yield is nearly 2 percentage points below its 10-year average of 3.54 percent.

German “yield levels are still at very extreme levels,” said Rasmus Rousing, a fixed-income strategist at Credit Suisse Group AG in Zurich. “It’s more than just data weakness that’s priced in. The market is pricing for a very adverse outcome in the euro zone.”

The yield on two-year Dutch notes slipped three basis points to 0.26 percent after the Netherlands sold 86-day Treasury bills at a rate of minus 0.013 percent. That’s a record-low yield at Dutch auctions of three-month securities, according to the nation’s debt management agency.

German bonds have returned 2 percent this year, while Spanish securities handed investors a loss of 3.5 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian debt earned 8.7 percent.

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