Italian Bonds Rise After Debt Auction as Political Deadlock Ends

Italy’s government bonds rose, pushing 10-year yields toward the lowest level since October 2010, as the swearing-in of a new prime minister yesterday ended nine weeks of political deadlock.

Two-year notes gained for a second day after Premier Enrico Letta said that he is committed to controlling public finances. Italy sold bonds maturing in 2023 at the lowest auction yield since October 2010. Spanish 10-year yields dropped to the lowest since November 2010 as German finance minister Wolfgang Schaeuble said he would use a meeting with Spanish counterpart Luis de Guindos to unveil a plan aimed at spurring investment in Spanish companies. Benchmark German bunds were little changed.

“With a new government, Italy has removed a large chunk of uncertainty and that should be positive for Italian bonds and peripherals,” said Soeren Moerch, the head of fixed-income trading at Danske Bank A/S in Copenhagen. “Now we have to see if it can deliver reforms to growth.”

Italian 10-year yields dropped 14 basis points, or 0.14 percentage point, to 3.92 percent at 4:41 p.m. London time after falling to 3.89 percent on April 23, the lowest since Oct. 27, 2010. The 5.5 percent bond maturing in November 2022 rose 1.175, or 11.75 euros per 1,000-euro ($1,310) face amount, to 112.77.

Two-year yields slid 14 basis points to 1.15 percent after falling to 1.13 percent on April 23, the least on record. Spain’s 10-year yield declined 12 basis points to 4.16 percent after reaching 4.15 percent, the lowest since Oct. 27, 2010.

Italy’s Coalition

In his first speech to Italy’s Chamber of Deputies as premier, Letta vowed to suspend the collection of a disputed property tax and review the levy in a bid to stimulate the country’s shrinking economy. He faces confidence votes in both houses of parliament to install his government.

Letta managed to assemble a coalition government by forging an alliance last week with former premier Silvio Berlusconi, whose support virtually guarantees the success of parliamentary votes in the euro region’s third-biggest economy.

The nation has been in a political deadlock since inconclusive elections on Feb. 24-25.

Italy sold 3 billion euros of 10-year bonds at an average yield of 3.94 percent, with investors bidding for 1.42 times the amount for sale. The nation last sold 10-year securities on March 27 at 4.66 percent.

The Rome-based Treasury also allotted 3 billion euros of notes maturing in 2018 at 2.84 percent, down from 3.65 percent at last month’s auction.

German Inflation

Germany’s 10-year bund yielded 1.20 percent after touching 1.19 percent, the lowest since July 24, as a report showed the inflation rate in the Europe’s largest economy slumped to the lowest in more than 2 1/2 years in April.

Germany’s annual inflation rate, calculated using a harmonized European Union method, fell to 1.1 percent from 1.8 percent in March. That’s the lowest since August 2010. Economists predicted a slowdown to 1.7 percent, according to the median of 19 forecasts in a Bloomberg survey.

Two-year note yields fell below zero for the first time since April 18, meaning investors who hold the securities until they mature will receive less than they paid for them.

A separate report confirmed consumer confidence in the euro area increased this month. An index of household confidence in the 17-nation euro bloc climbed to minus 22.3 from minus 23.5 in March, according to data from the European Commission in Brussels.

The European Central Bank will reduce its main refinancing rate by 25 basis points to 0.5 percent at its meeting on May 2, according the median estimate of 70 economists in a Bloomberg News survey.

ECB President Mario Draghi said at the previous policy meeting on April 4 that risks to the euro area’s economic outlook remained on the downside.

‘Direct Impact’

“You could argue how much of a direct impact a rate cut would have,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London, talking on Bloomberg Television’s “On the Move” with Francine Lacqua. “At the very least it would show the ECB is attempting to shore up confidence as the slowdown in growth, which has clearly affected the periphery, now seems to be leaking into the core.”

Belgium’s 10-year bond yields were little changed at 1.98 percent after the nation sold an additional 1.1 billion euros of the securities at a record-low auction yield of 1.971 percent today. The Belgian Debt Agency also allotted 1 billion euros of five-year notes at an all-time auction low of 0.821 percent.

The nation also sold government debt due in 2021 and 2028.

Volatility on Spanish bonds was the highest in euro-area markets today followed by those of Italy and Finland, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.

Italian bonds returned 3.7 percent this year through April 26, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt gained 7.4 percent, while German bonds earned 1.1 percent.