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Italy 10-Year Bonds Rise as Economy Contracts Less Than Forecast

Italian 10-year bonds rose for a third day after a report showed the nation’s economy contracted less last quarter than analysts forecast.

Italy’s government securities led gains in euro-area debt even as the data indicated the nation’s fourth recession since 2001 entered its second year. Spain’s notes fell, with two-year yields approaching the highest in five weeks, after a separate report showed the country’s gross domestic product shrank for a fifth quarter. France’s 10-year bonds gained after the nation auctioned 8.8 billion euros ($11.3 billion) of securities, including two- and five-year debt at record-low yields.

“We have seen slightly better numbers than expected in Italy,” said Michael Markovich, head of global interest-rates research at Credit Suisse Group AG in Zurich. “Italy has benefited whereas the Spanish numbers were not as nice.”

Italy’s 10-year bond yield dropped six basis points, or 0.06 percentage point, to 4.90 percent at 4:41 p.m. London time, after reaching 4.89 percent, the lowest since Nov. 7. The 5.5 percent security due in November 2022 rose 0.49, or 4.90 euros per 1,000-euro face amount, to 105.165. The two-year rate declined four basis points to 2.28 percent.

Italian GDP fell 0.2 percent from the second quarter, when it decreased a revised 0.7 percent, the National Statistics Institute said in a preliminary report. The decline was less than the 0.5 percent median forecast in a Bloomberg News survey of 21 economists. The Spanish economy shrank by 0.3 percent, a separate report showed.

Budget Cuts

Europe’s economic malaise is deepening as the region’s sovereign-debt crisis that pushed Spanish and Italian bond yields to record highs forces governments to impose budget cuts to narrow their fiscal deficits. Spain and Cyprus this year joined the list of countries seeking external aid, following Greece, Portugal and Ireland.

Spain’s two-year yield climbed one basis point to 3.25 percent after rising to 3.29 percent on Nov. 13, the highest level since Oct. 12.

France sold 7.5 billion euros of notes maturing between 2014 and 2017 and a combined 1.3 billion euros of inflation-linked securities due from 2016 to 2027.

The two-year securities were sold at a record-low yield of 0.1 percent, down from 0.19 percent at the previous auction on Oct. 18. The five-year notes were sold at 0.76 percent, also an all-time low, versus 0.92 percent in October.

French 10-year bond yields declined two basis points to 2.08 percent.

German Yields

Germany’s 10-year yield was little changed at 1.34 percent. It dropped to 1.31 percent on Nov. 13, matching the lowest since Aug. 31. Two-year notes yielded minus 0.029 percent. A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.

Volatility on Italian bonds was the highest in euro-region markets today, followed by those of Greece, according to measures of 10-year or equivalent-maturity debt, the spread between two- and 10-year securities, and credit default swaps.

Irish bonds were little changed after Fitch Ratings yesterday raised its outlook on the nation’s debt to stable from negative and affirmed its BBB+ stance on the nation. The Irish bond maturing in October 2020 yielded 4.74 percent.

Ireland sold 500 million euros of 91-day bills at an average yield of 0.55 percent today, with investors bidding for 4.1 times the amount of securities allotted.

Inflation Data

A report showed consumer-price inflation in the euro area slowed in October. The annual inflation rate in the region fell to 2.5 percent, in line with a first estimate on Oct. 31, from 2.6 percent in September, the European Union’s statistics office in Luxembourg said.

The so-called 10-year German break-even rate, the difference between yields on bunds and index-linked securities used as a measure of inflation expectations, narrowed one basis point to 1.63 percent, after reaching 1.62 percent, the least since July 26.

German bonds returned 4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt rose 1.9 percent and French securities gained 9.2 percent.

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