Italy, Spain 2-Year Notes Fall as Investors Pare ECB Buying Bets

Italian and Spanish two-year notes fell for the first time in five days as investors pared bets the European Central Bank will be able to stem the debt crisis through buying government bonds.

The decline in shorter-maturity debt saw the extra yield investors demand to hold Spain’s 10-year bonds over two-year notes narrow from a record set yesterday. Italian lawmakers hold a final vote on spending-reduction measures today after a government report showed the economy shrank for a fourth quarter. German 10-year bunds fell before a debt sale tomorrow. Greece sold six-month bills.

“We’ve seen a bit of a reversal of the recent curve steepening,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London, referring to a situation where longer-maturity yields rise more than those on shorter-dated debt. “There’s a bit of political risk in Italy, with a Parliamentary vote on spending cuts seen as a possible hurdle.”

Italy’s two-year note yield climbed 15 basis points, or 0.15 percentage point, to 3.19 percent at 5 p.m. London time. The 4.25 percent bond due July 2014 fell 0.28, or 2.80 euros per 1,000-euro ($1,242) face amount, to 101.975.

The Spanish two-year yield increased 36 basis points to 3.85 percent, while the 10-year yield climbed 12 basis points to 6.86 percent. The spread between the two securities shrank by 14 basis points to 312 basis points, after widening to a record 343 basis points yesterday.

Assistance Request

Yields on Italian and Spanish notes have tumbled since ECB President Mario Draghi said on Aug. 2 that any bond purchases undertaken by the bank in unison with the European Financial Stability Facility would focus on shorter-maturity debt.

Nations will need to make a request before the central bank or European bailout funds will buy their bonds, he said. The European Union today said it has received no requests to activate the program.

The German 10-year bund yield climbed nine basis points to 1.49 percent. The two-year yield rose three basis points to minus 0.03 percent.

The country will auction 4 billion euros of 10-year securities tomorrow.

Italy’s gross domestic product slid 0.7 percent in the second quarter, according to a preliminary report today. The contraction was less than the median forecast for a 0.8 percent decline in a Bloomberg News survey. A separate report showed German factory orders declined in June more than twice as much as economists estimated.

Greek Sale

Greece sold six-month bills at an average yield of 4.68 percent, compared with 4.70 percent at the previous auction of the securities on July 10.

The yield on Greek government debt due February 2023 dropped 48 basis points to 24.60 percent. The price rose 0.56 to 19.43 percent of face value.

Volatility on Portuguese bonds was the highest in euro-area markets today, followed by those of Finland and Germany, according to measures of 10-year debt, the spread between two-year and 10-year securities and credit-default swaps.

Portuguese 10-year bonds advanced for a ninth day, with the yield dropping 42 basis points to 10.05 percent. The rate on two-year notes fell 74 basis points to 5.90 percent after touching 5.83 percent, the lowest level since March 2011.

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