Italy’s Yield Gap Over Germany Drops Most in 5 Weeks on China

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Italian government bonds rose, cutting the yield premium investors demand to hold 10-year debt over German bunds by the most in almost five weeks, after China’s verbal support for the yuan helped end a two-day rout in the currency.

German sovereign debt, the region’s benchmark securities, declined for the first time in three days, as demand for haven assets waned. The People’s Bank of China said it would intervene to control large fluctuations of its currency, after three days of cuts to its reference rate.

German securities advanced over the past two days amid speculation that the economic slowdown in China would curb global growth and inflation, prompting central banks to maintain extraordinary levels of monetary stimulus for longer. Traders pushed back bets on when both the Federal Reserve and Bank of England would raise interest rates.

“It’s removed the big downside risk that people were worrying about,” said John Stopford, London-based head of fixed income at Investec Asset Management Ltd. “We are not going see the Chinese currency move into freefall and set off more aggressive deflation and policy responses.”

Italy’s 10-year bond yield fell four basis points, or 0.04 percentage point, to 1.79 percent as of 4:19 p.m. London time. The 1.5 percent security due June 2025 rose 0.335, or 3.35 euros per 1,000-euro ($1,114) face amount, to 97.51.

That helped narrow the spread over similar-maturity German bunds by six basis points to 1.16 percentage points. Benchmark bund yields rose three basis points to 0.63 percent. The yield declined nine basis points over the previous two days.

ECB Statement

The European Central Bank said it is ready to tweak its 1.1 trillion-euro bond-purchase plan if necessary to respond to global market volatility amid “unusually low” inflation and “disappointing” economic growth. Uncertainty in financial markets called for alertness, according to a summary account of the July monetary policy meeting published on Thursday.

“Financial developments in China could have a larger than expected adverse impact, given this country’s prominent role in global trade,” the ECB said.

Data due Friday will show the region’s economy expanded 0.4 percent in the second quarter, while consumer-price growth held at an annual 0.2 percent in July, according to economists forecast in Bloomberg surveys.

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