Italian Bonds Rise as Euro-Area Output Beats Analyst Forecasts

Italian and Spanish government bonds advanced after a report showed euro-area services and manufacturing output contracted at a slower pace in December, underpinning demand for the region’s higher-yielding securities.

Portugal’s 10-year yields dropped to the lowest since February 2011 as European Union leaders meeting in Brussels pledged to seek a joint strategy for handling failing banks. Greek bonds rose for a sixth week after regional finance ministers yesterday approved the next tranche of rescue funds for the nation. German 10-year bunds completed a weekly decline.

“The data was a tad better than expectations,” said Anders Moeller Lumholtz, a Copenhagen-based analyst at Danske Bank A/S. “This is another sign that the cycle in the euro-area has bottomed. It is supportive for higher-yielding assets.”

Italy’s 10-year yield fell four basis points, or 0.04 percentage point, to 4.60 percent at 5 p.m. London time, paring this week’s increase to eight basis points. The 5.5 percent security due November 2022 rose 0.31, or 3.10 euros per 1,000-euro ($1,313) face amount, to 107.465. The yield on similar-maturity Spanish bonds fell one basis point to 5.39 percent.

A composite index based on a survey of purchasing managers in both industries rose to 47.3 from 46.5 in November, London-based Markit Economics said today. Economists forecast a reading of 46.9, according to the median of 16 estimates in a Bloomberg News survey. A number below 50 indicates contraction.

The euro-area services index increased to 47.8 in December from 46.7 in November, Markit said. The manufacturing gauge rose to 46.3 from 46.2.

Confidence ‘Improved’

Portugal’s 10-year yield declined 15 basis points to 7.09 percent, the lowest level since Feb. 7, 2011.

The extra yield investors demand to hold the securities instead of their German equivalents contracted 14 basis points to 574 basis points, the narrowest since April 2011.

Today’s better-than-forecast data underline the view that it will take a “renewed deterioration” in the economic outlook for the European Central Bank to cut interest rates, Bank of America-Merrill Lynch London-based economists Nick Bate and Laurence Boone wrote in a note to clients.

EU finance ministers meeting overnight in Brussels agreed to put the ECB in charge of all euro-area lenders in a deal that paves the way for the currency bloc’s firewall fund to provide direct bailouts to banks.

‘Key Points’

“We’ve agreed on the key points to create a European bank supervision that’s supposed to start in 2014,” German Finance Minister Wolfgang Schaeuble said after the meeting. The agreement opens the way for negotiations to take place with the European Parliament.

Germany’s 10-year bund yield was little changed at 1.35 percent, having increased five basis points this week.

Volatility on German debt was the highest among euro-area nations tracked by Bloomberg, followed by those of Portugal and Netherlands, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

The Greek 10-year yield dropped 144 basis points this week to 13.02 percent, with the price rising to 44.38 percent of face value. The securities were little changed today.

Greek Prime Minister Antonis Samaras pledged to forge ahead with policies to revive the recession-wracked country after winning the release of emergency international aid to keep Greece solvent.

“There is no time for rest,” Samaras told reporters in Brussels after the EU summit. “One marathon has just ended, but we are ready to start the next.”

German bonds returned 4.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italy’s debt gained 20 percent and Spain’s rose 5.2 percent.

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