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Italian Bonds Rise as Five-Year Borrowing Costs Fall at Auction

Italy’s government bonds advanced, pushing 10-year yields down by the most in almost six months, after the country’s borrowing costs declined at an auction of five-year debt.

Italy sold 3 billion euros ($4.14 billion) of December 2018 notes at an average yield of 2.71 percent, down from 2.89 percent at a previous auction in October. The extra yield that investors demand to hold Italian 10-year bonds instead of German bunds fell to the lowest since 2011. Germany’s bonds posted an annual decline before a report this week that economists said will confirm euro-area manufacturing expanded at a faster pace this month, damping demand for the region’s safest assets.

“There was a strong squeeze in spreads into the supply as well, which suggests there was genuine demand,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “Italian debt outperformed as a result.”

Italy’s 10-year yield declined 12 basis points, or 0.12 percentage point, to 4.09 percent at 5 p.m. London time, the biggest daily drop since July 1. The 4.5 percent bond due in March 2024 gained 1.02, or 10.2 euros per 1,000-euro face amount, to 103.72. The nation’s five-year note yield dropped 11 basis points to 2.71 percent. That’s the biggest decline since Nov. 7.

The Rome-based Treasury sold 2.5 billion euros of the 10-year securities at 4.11 percent, compared with 4.01 percent at a previous auction on Nov. 28.

Draghi Pledge

Demand for Italian bonds has been buoyed since European Central Bank President Mario Draghi said in July 2012 that the ECB was prepared to do “whatever it takes” to preserve the euro. That helped to reverse a selloff that had pushed the 10-year yield to as high as 7.48 percent in November 2011 amid the region’s sovereign debt crisis.

The yield difference between Italian 10-year bonds and similar-maturity German bunds fell 10 basis points to 216 basis points, after dropping to 215 basis points, the least since July 2011.

The rate on Spain’s 10-year bonds fell eight basis points to 4.14 percent. The Spanish securities yielded 221 basis points more than bunds, after the spread narrowed to 219, the least since Dec. 11.

Germany’s 10-year yield fell three basis points to 1.93 percent after climbing to 1.96 percent, the highest level since Sept. 23. The rate was at 1.32 percent on Dec. 31, 2012.

An index based on a survey of purchasing managers in the euro region’s manufacturing industry increased to 52.7, a 31-month high, from 51.6 in November, London-based Markit Economics will say on Jan. 2, according to the median estimate in a Bloomberg News survey of analysts.

Italian government bonds returned 7 percent this year through Dec. 27, according to Bloomberg World Bond Indexes. Spain’s earned 11 percent, while Germany’s lost 2.3 percent.

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