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Italian Bonds Slump as Monti Says He’ll Resign; Greek Debt Gains

Italian government bonds slumped, with the 10-year yield climbing by the most since August, after Prime Minister Mario Monti said he would resign as he has lost support in Parliament.

Two-year yields jumped to the highest level since September as former Prime Minister Silvio Berlusconi and his allies withdrew support for Monti’s government, threatening to derail passage of the 2013 budget. Italy is due to sell bonds and bills this week. Spanish securities also dropped while French, Belgian and Austrian 10-year yields fell to euro-era lows. Greek bonds advanced as the country extended the deadline for a buyback of its debt.

“We are seeing a selloff but I wouldn’t call it a panic yet,” said Elwin de Groot, a senior economist at Rabobank Nederland in Utrecht, Netherlands. “The auction this week could be an interesting litmus test for investors. This has also created uncertainty for Europe-wide policy making.”

Italy’s 10-year yield rose 29 basis points, or 0.29 percentage point, to 4.82 percent at 4:22 p.m. London time after climbing as much as 38 basis points, the most since Aug. 2. The 5.5 percent bond due in November 2022 fell 2.36, or 23.60 euros per 1,000-euro ($1,293) face amount, to 105.75.

The two-year yield gained 33 basis points to 2.31 percent after rising to 2.47 percent, the highest since Sept. 27.

Most Volatile

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

Monti said Dec. 8 he will resign due to parliamentary opposition from Berlusconi and his allies, who had previously backed his government. The former prime minister said the same day he will seek the premiership in next year’s election and criticized his successor’s “German-centric” austerity program. Monti is undecided whether to run for a second term, la Repubblica said today, citing a telephone call with the premier.

Italian 10-year yields have dropped from their high of 7.48 percent reached in November 2011 as Monti’s government implemented austerity to put the country on track to bring its deficit within the European Union’s limit of 3 percent of gross domestic product this year.

Italian Auctions

Italy is scheduled to auction 6.5 billion euros of 364-day bills on Dec. 12 and zero-coupon bonds the following day.

Investors should “be prepared for some further weakness until the auction,” Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan, wrote today in a note to clients. “It is important to stress, however, that the short-term reaction will unlikely become entrenched in prices over a more medium term horizon.”

Greece’s 10-year bonds gained for a third day with the yield falling 65 basis points to 13.81 percent, the lowest since the debt was restructured in March. The price of the 2 percent bond maturing in February 2023 climbed 1.97 to 41.81 percent of face value.

The nation is giving investors until midday London time tomorrow to offer their bond holdings under their buyback program, the Public Debt Management Agency said today on its website. Holders of securities already tendered can’t revoke or modify their participation, the statement said. The original deadline was 5 p.m. on Dec. 7.

Greece was near its target in the buyback with almost 30 billion euros offered, an official at the Finance Ministry said yesterday on condition of anonymity, referring to the face value of the securities.

German Bonds

German 10-year yields were little changed at 1.30 percent after dropping to 1.26 percent, the lowest level since Aug. 3.

Two-year yields were at minus 0.075 percent after declining to negative 0.092 percent, approaching the record minus 0.097 percent set Aug. 2. A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.

French 10-year yields dropped to a euro-era record 1.916 percent, before being little changed at 1.95 percent. Belgium’s 10-year rate fell to an all-time low 2.06 percent and Austria’s slid to as little as 1.67 percent.

Germany’s bunds, the region’s safest securities, gained even as report showed the nation’s exports unexpectedly increased in October.

German bonds returned 4.3 percent this year through last week, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spain’s debt gained 4.7 percent and Italy’s earned 20 percent.

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