Italian government bonds fell, with 10-year yields rising the most in eight weeks, as speculation the Federal Reserve will reduce asset purchases damped the outlook for the global recovery.
Spanish, Belgian and Dutch securities also declined as the Bundesbank said the European Central Bank may raise interest rates if inflation pressure increases, even as the central bank pledges to keep borrowing costs low. German 10-year yields rose to the highest in almost 17 months before the Fed releases the minutes of its July meeting this week that may provide clues as to whether it will start to reduce debt purchases as soon as its Sept. 17-18 gathering.
“The market is increasingly confident that the Fed will taper at its next meeting,” said Richard McGuire, a fixed-income strategist at Rabobank International in London. “That expectation of stimulus reduction is negative for risk in a broad sense. Periphery spreads may widen as the market becomes more sensitive to fundamental drivers.”
Italy’s 10-year yield climbed nine basis points, or 0.09 percentage point, to 4.28 percent at 4:49 p.m. London time, the biggest increase since June 24. The 4.5 percent bond maturing in May 2023 dropped 0.72, or 7.20 euros per 1,000-euro ($1,335) face amount, to 102.10.
Similar-maturity Spanish yields increased five basis points to 4.41 percent after declining to 4.36 percent on Aug. 16, the lowest level since May 31.
The Fed’s first step may be tapering monthly debt purchases in September by $10 billion to a $75 billion pace, according to a Bloomberg survey concluded last week. The central bank will end its asset buying in the middle of 2014, according to the median estimate of 48 economists in the Aug. 9-13 survey.
The ECB’s commitment to keep rates low “is not an imperative statement, and it doesn’t represent a change” in the monetary-policy stance, the German central bank said in its monthly report. “Forward guidance doesn’t rule out an increase in the benchmark rate if greater inflation pressure emerges.”
ECB President Mario Draghi said in July for the first time that the central bank will keep interest rates at current levels or lower for an extended period of time. He reiterated his statement this month, trying to assure investors that the ECB won’t tighten policy too soon after it cut its main refinancing rate to a record-low 0.5 percent in May.
Germany’s 10-year bund yield climbed two basis points to 1.90 percent after increasing to 1.92 percent, the highest level since March 27, 2012.
Benchmark bund yields jumped 20 basis points last week, the most since the period ended June 21, as a report showed the euro-area emerged from recession in the second quarter, damping speculation ECB policy makers will cut interest rates to encourage growth.
“Last week’s story for me was about Europe’s recovery,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “The expectations about whether Draghi would deliver another rate cut was affected by the numbers last week.”
France allotted 7.2 billion euros of bills today, while the Netherlands sold 3.01 billion euros of short-dated securities.
Volatility on Belgian securities was the highest in euro-area markets today, followed by those of Austria and Greece, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
Belgium’s 10-year yield rose six basis points to 2.74 percent after reaching 2.75 percent, the most since June 26. Dutch 10-year yields climbed five basis points to 2.30 percent, after reaching 2.33 percent, the highest since April 2012.
Italy’s securities returned 4.6 percent this year through Aug. 16, according to Bloomberg World Bond Indexes. Spain’s earned 8.2 percent, while German bonds declined 2.3 percent.