Italian and Spanish notes rose as data showed European services output shrank less than economists estimated last month, fueling optimism about the region’s recovery and overshadowing prospects of political instability.
German bunds slumped, pushing 10-year yields up from the least in more than a week, as gains in European stocks sapped demand for the euro area’s safest assets. Spanish bonds advanced as Prime Minister Mariano Rajoy battled to rebut corruption allegations. Italian two-year note yields dropped the most in three weeks amid easing investor concern that budget reforms will be derailed as former Prime Minister Silvio Berlusconi seeks a return to office.
“It is perhaps too soon to conclude that this is the long-awaited reality check by the market,” said Elwin de Groot, a market economist at Rabobank Nederland in Utrecht, the Netherlands. “Political factors such as we are seeing in Spain and Italy at the moment are always extremely difficult to gauge. This could weigh on Spanish and Italian bonds for some time but we should acknowledge the rally in markets since mid-2012.”
Italian two-year yields declined nine basis points, or 0.09 percentage point, to 1.64 percent at 4:23 p.m. London time, after sliding as much as 14 basis points, the steepest drop since Jan. 10. The 6 percent security due November 2014 rose 0.15 or 1.50 euros per 1,000-euro ($1,352) face amount, to 107.55. Ten-year yields slipped one basis point to 4.46 percent, after climbing to 4.55 percent, the highest since Dec. 28.
Yields on Spanish two-year notes fell nine basis points to 2.80 percent while those on 10-year bonds were six basis points lower at 5.38 percent.
An index based on a survey of purchasing managers in the euro-area services industry rose to 48.6 from 47.8 in December, London-based Markit Economics said in a report today. That’s above an initial estimate of 48.3 published on Jan. 24. A reading below 50 indicates contraction.
Bunds declined even as a report showed euro-area retail sales fell more than economists estimated in December.
Sales in the 17-nation currency bloc fell 0.8 percent from November, when they slipped a revised 0.1 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast a decline of 0.5 percent, according to the median of 23 estimates in a Bloomberg News survey.
Germany’s 10-year yield climbed five basis points to 1.66 percent after dropping 10 basis points in the past three days.
Yields on Spanish bonds surged yesterday as Rajoy’s assurances that allegations of illegal payments are false failed to contain criticism. Opposition leader Alfredo Perez Rubalcaba demanded on Jan. 3 that he step down to restore faith in the nation’s political class.
Rajoy’s battle to rebut corruption allegations is adding to the risk of holding Spanish government debt, according to Pacific Investment Management Co.
“There is uncertainty as to the continuation of the government’s policies and its leadership,” Andrew Bosomworth, managing director at Pacific Investment Management Co., said in a phone interview yesterday. “At least some questions remain unanswered. That leads to uncertainty in the market.”
Italy’s caretaker prime minister Mario Monti accused Berlusconi of trying to buy votes by promising a cash rebate of 4 billion euros. The gap between the center-left bloc, led by Democratic Party leader Pier Luigi Bersani, and Berlusconi’s coalition has narrowed by 1.2 percentage points to 6.1 points, according to an IPR poll for RAI3 released yesterday.
Volatility on Italian bonds was the highest in euro-area markets today, followed by those of France and the Netherlands, according to measures of 10-year or similar-maturity debt, the yield spread between two-year and 10-year securities, and credit-default swaps.
German government bonds have handed investors a loss of 1.4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish and Italian securities returned 0.7 percent, the indexes show.