Italy Bonds Rise as Draghi Predicts Recovery; Bunds Fall

Italian 10-year bonds rose this week, with the yield falling to a two-week low, after European Central Bank President Mario Draghi said reforms in the euro area have revived confidence that will help foster a recovery.

Spanish 10-year bonds climbed for a second week as borrowing costs fell at an auction of 3.52 billion euros ($4.65 billion) of bills. German bunds dropped after data showed business confidence in the nation increased for a second month in December, undermining demand for the euro region’s safest fixed-income assets. Greece’s 10-year bonds advanced for a seventh week after Standard & Poor’s raised the country’s credit rating.

“The general perception that the worst is over is something that is supporting market sentiment and higher-yielding euro-area assets,” said Anders Moeller Lumholtz, a Copenhagen-based analyst at Danske Bank A/S. “The confidence data confirmed the perception that we have seen a bottom in the euro-area economic cycle.”

Italian 10-year yields declined 13 basis points, or 0.13 percentage point, this week to 4.47 percent at 5 p.m. in London yesterday. The rate fell to 4.35 percent on Dec. 19, the lowest since Dec. 3, 2010. The 5.5 percent bond maturing in November 2022 rose 1.045, or 10.45 euros per 1,000-euro face amount, to 108.51.

Spanish Sale

The rate on similar-maturity Spanish bonds declined 14 basis points to 5.25 percent and dropped to 5.20 percent on Dec. 20, the least since Dec. 3.

Spain sold three-month bills at an average yield of 1.195 percent on Dec. 18, down from 1.254 percent at a previous auction on Nov. 27, and six-month securities at 1.609 percent, compared with 1.669 percent last month.

“The impression that one has of this year, at least of the second part of this year, is of a gradual improvement in financing conditions which is one of the reasons why we foresee a beginning of a recovery in the second part of next year,” Draghi said in testimony at the European Parliament’s Economic and Monetary Affairs Committee on Dec. 18. Recent economic “indicators have stabilized at low levels.”

Germany’s Ifo institute’s business climate index, based on a survey of 7,000 executives, improved to 102.4 from 101.4 in November, according to data released on Dec. 19. Economists surveyed by Bloomberg News predicted an increase to 102.

German 10-year yields climbed three basis points this week to 1.38 percent.

Greece Upgrade

S&P on Dec. 18 raised Greece’s credit rating to B- from selective default after a bond buyback earlier this month helped reduce the country’s debt burden.

Finance Minister Yannis Stournaras called the upgrade a “great success” for his country, which has received 240 billion euros of loan pledges from the euro area and International Monetary Fund in two bailouts since May 2010.

“The Greek upgrade did spur a move lower in Greece’s yields,” said Peter Chatwell, a strategist at Credit Agricole Corporate & Investment Bank in London. “As people try and look ahead to next year, the market is reevaluating periphery debt.”

Greece’s 10-year rate dropped 1.13 percentage points this week to 11.90 percent, and fell to as low as 11.20 percent yesterday, the least since the nation’s debt restructuring in March.

Euro-region government bond markets will be closed from Dec. 24 through Dec. 26, according to the website of Eurex, a derivatives exchange unit of Frankfurt-based Deutsche Boerse AG.

German bunds returned 3.8 percent this year through Dec. 20, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian debt earned 21 percent while Spanish bonds gained 6.3 percent.