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European Bonds Rise on Banking Accord, Italian Debt Sale Demand

European government bonds rose after the region’s finance chiefs reached an agreement on how to handle failing banks, bolstering investor confidence that policy makers can overcome the euro-area financial crisis.

Italy’s securities advanced as demand increased at a 5 billion-euro ($6.5 billion) auction of five- and 10-year debt. Spain’s 10-year yield dropped to the lowest level in a week after falling the most since January yesterday on a pledge by European Central Bank President Mario Draghi to keep monetary policy accommodative. German bunds rose for a third day.

“The agreement on the bank recovery has to be taken as a positive,” said Alessandro Giansanti, a senior interest-rate strategist at ING Groep NV in Amsterdam. “That has been a relevant concern for the market in the previous weeks. The ECB comments re-affirming that an accommodative stance is still in place have reduced anxiety in the market.”

Italy’s 10-year bond yield fell 13 basis points, or 0.13 percentage point, to 4.57 percent at 4:55 p.m. London time after dropping 15 basis points yesterday, the most since June 7. The 4.5 percent security due in May 2023 rose 1.025, or 10.25 euros per 1,000-euro face amount, to 99.855.

The yield on similar-maturity Spanish debt dropped six basis points to 4.78 percent after reaching 4.73 percent, the lowest since June 20. The rate fell 23 basis points yesterday, the biggest decline since Jan. 10.

Emergency Talks

European Union ministers settled on guidelines for assigning losses to private creditors and regulating public assistance following seven hours of emergency negotiations in Brussels. They also spelled out when governments can step in and established a role for the European Stability Mechanism, the euro area’s 500 billion-euro firewall fund.

The ECB’s monetary policy “will stay accommodative for the foreseeable future,” Draghi said yesterday in Paris. “We have an open mind about all other possible instruments that we may consider proper to adopt.” An end to the policy remains “very distant,” he told reporters.

The ECB lowered its main interest rate to a record-low 0.5 percent on May 2.

Government bonds around the world tumbled after Federal Reserve Chairman Ben S. Bernanke said on June 19 U.S. policy makers may begin paring asset purchases this year and end them in mid-2014.

Spain’s 10-year yields increased from this year’s low of 3.94 percent set on May 3. Spanish securities have lost 1.6 percent this month through yesterday, according to the Bloomberg Spain Sovereign Bond Index.

Italian Auctions

Italy auctioned 2.5 billion euros of debt due in 2023 at an average yield of 4.55 percent. The nation last sold 10-year bonds on May 30 at an average yield of 4.14 percent, up from 3.94 percent at a previous auction on April 29, the lowest rate since October 2010. Investors bid for 1.46 times the amount sold, up from a bid-to-cover ratio of 1.38 in May.

“Demand for the 10-year sale was higher than previously and the rise in the auction yield was not particularly striking,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit Global Research in Milan. “With this potential obstacle passed, there is room today for Italian bonds to continue outperforming.”

The Treasury in Rome also allotted 2.5 billion euros of five-year notes at 3.47 percent. That compares with a rate of 3.01 percent at a previous sale on May 30.

Italy’s 10-year yield climbed from as low as 3.68 percent on May 3 to reach as much as 4.94 percent yesterday. The nation’s securities dropped 2.6 percent this month through yesterday, the Bloomberg Italy Sovereign Bond Index shows.

Germany’s government bonds advanced even as a report showed unemployment in the euro area’s biggest economy unexpectedly dropped in June.

Unemployment Falls

The number of people out of work in Germany fell 12,000 this month to 2.94 million after a revised 17,000 gain in May, the Federal Labor Office in Nuremberg said. Economists predicted a June increase of 8,000, according to the median of 35 estimates in a Bloomberg News survey.

Ten-year bund yields fell four basis points to 1.73 percent. The rate also declined four basis points yesterday.

Cyprus offered to swap 1 billion euros of its shorter-dated government bonds for others with longer maturities as it sought to meet the requirements of the 10 billion-euro rescue deal agreed on in March.

An index of consumer confidence in the currency bloc rose to minus 18.8 from minus 21.9 in May, the European Commission in Brussels said today, in line with the median estimate of 22 economists in a Bloomberg survey. That’s the highest level since August 2011.

Spanish securities earned 4.8 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italian bonds returned 1 percent, while German securities lost 1.9 percent, the indexes show.

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