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Italian Bonds Climb as Demand Rises at Sale; Bunds Slip

Italian bonds rose for the first time in four days after investor demand for the nation’s securities increased at a sale of three-year notes, easing concern that a Spanish downgrade would deepen the debt crisis.

The advance pushed 10-year yields down from a two-week high. Italy sold 3.75 billion euros ($4.8 billion) of its July 2015 securities, the maximum sales target, to yield 2.86 percent. Investors bid for 1.67 times the amount sold, up from 1.49 times at a sale on Sept. 13. Spain’s 10-year bonds advanced even after Standard & Poor’s cut the nation’s credit ranking two levels to BBB- yesterday, and gave it a negative outlook. German 10-year yields reversed gains after touching a one-week low.

“The auctions were pretty good, they issued at the top end of the range and that had a small positive effect,” said Mohit Kumar, head of European fixed-income strategy at Deutsche Bank AG in London. “The market is still waiting for the next step, which is for Spain to ask for a bailout.”

Italy’s 10-year yield fell nine basis points, or 0.09 percentage point, to 5.02 percent at 4:30 p.m. London time. The 5.5 percent bond due November 2022 rose 0.73, or 7.30 euros per 1,000-euro face amount, to 104.265.

Italy also sold a total of 2.25 billion euros of bonds due in 2016, 2018 and 2025 to yield 3.42 percent, 4.06 percent and 5.24 percent, respectively. The nation, which is due to pay 18 billion euros in redemptions on Oct. 15, auctioned 11 billion euros of bills yesterday.

Gross Issuance

Italy’s 10-year yield remains almost 1 percentage point above its average for the past decade. Still, its sovereign debt, currently about 120 percent of gross domestic product, is sustainable at current yields, debt agency head Maria Cannata said in an interview in Rome two days ago. Italy was forced to revise up its gross issuance for this year by about 20 billion euros, Cannata said.

Spain’s 10-year yield dropped four basis points to 5.76 percent after earlier climbing to 5.93 percent, the most since Oct. 1. Two-year note yields also fell four basis points, to 3.23 percent.

S&P’s downgrade of Spain comes after the nation announced a fifth austerity package in less than a year and published details about stress tests of its banks. Concern that the nation would be unable to pay its debts have grown since the government requested as much as 100 billion euros in European Union aid in June to shore up its lenders and amid signals that the government won’t be able to meet its deficit target.

Bailout Decision

Prime Minister Mariano Rajoy is weighing a second bailout amid a deepening recession, stalling on a decision about whether to request European Central Bank and EU bond purchases to lower borrowing costs. He has called for more detail on what would be demanded of Spain in return for aid.

“There’s some modest selling of Spain but the reaction will be limited because we have the ECB in the background ready to act and buy Spanish bonds,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich.

Spanish 10-year yields have declined about two percentage points since reaching a euro-era record 7.75 percent on July 25, the day before ECB President Mario Draghi pledged to do “whatever it takes” to safeguard Europe’s monetary union. Italian 10-year yields have dropped more than 150 basis points from 6.71 percent on July 25.

Germany’s 10-year yield climbed two basis points to 1.51 percent after earlier declining as much as five basis points to 1.44 percent, the lowest since Oct. 4.

French 10-year bonds rose for a fourth day, the longest run of advances since July, with the yield on the securities falling less than one basis point to 2.19 percent.

French Volatility

Volatility on Portugal’s government bonds was the highest in euro-region markets today, followed by Ireland, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit default swaps.

Yields on Ireland’s bonds maturing in October 2020 fell three basis points to 4.92 percent, the lowest level since August 2010, according to data compiled by Bloomberg.

Belgium’s 10-year yield fell as much as three basis points to a record 2.39 percent. The nation canceled an optional reverse-inquiry auction scheduled for tomorrow, the Belgian Debt Agency said in a statement today.

German bunds returned 3.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities advanced 1.6 percent, while Italian debt earned 16 percent.

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