Italian, Spanish Bonds Fall as ECB Aid Rules Concern Saps Demand

Italian, Spanish Bonds Fall
Italian notes also slid as a report showed the economy contracted more than initially reported in the second quarter, indicating Italy’s fourth recession since 2001 is deepening. Photographer: Alessia Pierdomenico/Bloomberg

Italian 10-year bonds snapped a five-day advance, leading declines in Europe’s lower-rated debt, amid concern conditions imposed on nations seeking assistance may hamper requests for European Central Bank bond purchases.

Germany’s 10-year bund yield rose after last week climbing the most in six after ECB President Mario Draghi announced details of an unlimited asset-purchase program to tame the region’s debt crisis. Spanish notes dropped before a German high court decision on bailout funding due Sept. 12 and after Greek Prime Minister Antonis Samaras yesterday failed to win agreement from his coalition partners on spending cuts required by lenders to his country to release funds.

“Greece shows us how difficult life can be within a program and the ECB’s purchases are conditional,” John Wraith, a fixed-income strategist at Bank of America Merrill Lynch said in a Bloomberg Television interview with Mark Barton. “If the Spanish or Italian governments start to pull back on the prospect of entering any program, then that will give the market a scent of blood and there will be periods where the yields come under upward pressure.”

The rate on Italian 10-year debt climbed 11 basis points, or 0.11 percentage point, to 5.17 percent at 4 p.m. London time. It jumped as much as 16 basis points, the biggest intraday gain since Aug. 2. The 5.5 percent bond due September 2022 fell 0.83, or 8.30 euros per 1,000-euro ($1,278) face amount, to 103.09.

Italian Notes

The nation’s notes also slid as a report showed the economy contracted more than initially reported in the second quarter, indicating Italy’s fourth recession since 2001 is deepening.

Italian gross domestic product contracted 0.8 percent from the previous three months, more than the 0.7 percent first reported by the National Statistics Institute. The two-year yield climbed five basis points to 2.29 percent, after surging as much as 19 basis points.

Spanish two-year notes fell for the first day in three, pushing the yield up 16 basis points to 2.89 percent.

The euro declined 0.2 percent to $1.2786, snapping a three-day advance, before Samaras meets officials from Greece’s creditors in Athens. Attempts to negotiate 11.5 billion euros of spending cuts stalled yesterday.

Draghi’s bond-purchase plan is geared toward regaining control of interest rates in the euro area and fighting speculation of a currency breakup. To trigger ECB purchases, governments in countries such as Spain and Italy need to request aid from Europe’s rescue fund and sign up to conditions.

Buying Recommendation

Germany’s 10-year yield rose three basis points to 1.55 percent, after rising to 1.63 percent on Sept. 7, the highest since June 29. The rate gained 19 basis points last week. It dropped to match its record-low 1.127 percent on July 23.

BNP Paribas SA recommends buying core European government bonds when 10-year bund yields are above 1.5 percent, according to a report by strategists including Paris-based Patrick Jacq.

“The fundamental context remains dovish,” the report said, citing weak growth prospects and the outlook for Federal Reserve action.

Portugal’s 10-year bonds declined, pushing the yield on the securities up 24 basis points to 8.34 percent. The two-year note yield climbed 15 basis points to 4.29 percent, after jumping as much as 111 basis points.

Volatility on Finland’s bonds was the highest in euro-area markets today, followed by Belgium and Italy, according to measures of 10-year debt, the spread between two-year and 10-year securities and credit-default swaps. Finland’s 10-year yield rose five basis points to 1.66 percent.

German bonds returned 2.8 percent this year through Sept. 7, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities advanced 1.8 percent and Italy’s debt earned 15 percent.

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