Italian Bonds Fall 6th Week Amid Fed Concern; German Bunds Gain

Italian government bonds fell for a sixth week, the longest losing streak in a year, amid concern the Federal Reserve will slow its asset-purchase program that has boosted higher-yielding securities around the world.

Italy’s 10-year yields climbed to the highest level in two months after a report showed gross domestic product shrank more than initially reported last quarter. Portuguese and Greek bonds also dropped this week after European Central Bank President Mario Draghi said debt purchases will only be used when prices are out of line with fundamentals. German bunds rose as speculation central banks will remove stimulus pushed down stocks and boosted demand for the region’s safest securities.

“If the Fed is thinking about an exit, it doesn’t leave high-yielding assets in a good position,” said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland Group Plc in London. “What the Fed does will remain the focus of markets. We also had the downward revision to Italian GDP.”

Italy’s 10-year yield rose nine basis points, or 0.09 percentage point, this week to 4.28 percent after climbing to 4.47 percent on June 11, the highest level since April 5. The 4.5 percent bond due in May 2023 fell 0.705, or 7.05 euros per 1,000-euro ($1,333) face amount, to 102.11. The six-week losing streak is the longest since April 2012.

Fed policy makers next meet on June 18-19 after Chairman Ben S. Bernanke said on May 22 that the central bank could reduce its monthly purchases of $45 billion of Treasuries and $40 billion of mortgage-backed securities if the employment outlook shows sustainable improvement.

Economy Shrinks

Italy’s economy shrank 0.6 percent from the previous three months, more than the 0.5 percent first reported on May 15, the Rome-based National Statistics Institute said on June 10.

Portugal’s 10-year yield climbed 16 basis points this week to 6.30 percent after rising to 6.65 percent on June 11, the highest since Feb. 26. Similar-maturity Greek yields jumped 47 basis points to 9.93 percent.

The ECB’s as-yet-unused program to the buy the bonds of the region’s most indebted nations, known as Outright Monetary Transactions, will only target yields that are out of line with fundamentals, Draghi said in an interview on German ZDF television on June 11.

“We will not intervene to ensure the solvency of countries that can’t” deal with money, he said.

German and French bonds advanced this week as stocks slid around the world on concern a withdrawal of Fed stimulus will curtail global growth.

The German 10-year yield dropped three basis points this week to 1.52 percent and France’s declined four basis points to 2.09 percent.

Italian bonds returned 2.6 percent this year through June 13, according to the Bloomberg Italy Sovereign Bond Index. Portuguese bonds returned 3.6 percent, while German bonds declined 0.9 percent, separate indexes show.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE