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Italian Bonds Climb as European Leaders Loosen Austerity Demands

Italy’s 10-year bonds advanced for a second day after Europe’s leaders signaled they would give the region’s most-indebted nations more time to bring down their budget deficits.

Italian five-year notes led gains as the nation bought back government debt maturing in 2015 and 2017. Spain’s 10-year bonds fell on speculation a rally that pushed yields to the lowest in more than two years this week was excessive. German bunds were poised for a weekly gain after a euro-area report showed the inflation rate fell for a second month.

“Italy is up a touch, which I would primarily attribute to the leeway being given by the European council to France and Italy to spend a bit more on capital investments and infrastructure, which takes the edge off the austerity element,” said Marc Ostwald, a rates strategist at Monument Securities Ltd. in London. “Italy is outperforming largely on the back of the short-end buyback.”

Italy’s 10-year yield fell five basis points, or 0.05 percentage point, to 4.60 percent at 11:44 a.m. London time after dropping two basis points yesterday. The 5.5 percent bond due November 2022 gained 0.37, or 3.70 euros per 1,000-euro face amount, to 107.335.

The nation’s five-year yield declined six basis points to 3.31 percent.

European Union leaders meeting at a summit in Brussels yesterday endorsed “structural” budgetary assessments, using code for granting countries such as France, Spain and Portugal extra time to trim their deficits. They are meeting again today.

Flexibility ‘Necessary’

“If there is too much austerity, there will be too much unemployment,” French President Francois Hollande said at the summit yesterday. “Flexibility is necessary if we want to make growth the priority.”

Spain’s 10-year bond yield climbed three basis points to 4.89 percent after falling to 4.70 percent on March 12, the lowest since November 2010.

Germany’s 10-year yield was little changed at 1.48 percent, having dropped five basis points this week.

The euro-area inflation rate fell to 1.8 percent in February from 2 percent the previous month, the European Union’s statistics office in Luxembourg said. The annual core inflation rate held at 1.3 percent.

Italian bonds returned 0.4 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities gained 1.1 percent, while Germany’s fell 0.1 percent.

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