Italian Bonds Fall as Fed Officials Signal Higher U.S. Rates

  • Spanish 10-year government securities also head lower
  • Germany allotted 810 million euros of 30-year bonds in auction

Italy’s government bonds led declines among the euro area’s higher-yielding sovereign securities amid speculation the Federal Reserve will raise interest rates more aggressively than investors have been predicting, damping demand for fixed-income assets.

Spanish bonds also fell after Chicago Fed President Charles Evans on Tuesday pushed back against traders pricing just a single rate increase by year-end or later. Germany’s bonds were little changed after the nation’s debt agency sold 30-year securities at an auction Wednesday that failed to draw enough bids to meet its target. The German government said it plans to keep its target for bond and bill sales unchanged in the second quarter.

Bonds declined “on a number of speeches from officials from the U.S.,” said Gianluca Ziglio, a strategist at Sunrise Brokers LLP in London. It “changes feeling to that Fed may be on the path to hiking rates anyway. The market seems to be caught in the middle,” he said.

Italian 10-year bond yields climbed four basis points, or 0.04 percentage point, to 1.30 percent at 4:25 p.m. London time, the biggest increase since March 15. The 2 percent security due in December 2025 fell 0.395, or 3.95 euros per 1,000-euro ($1,117) face amount, to 106.43.

Fed Outlook

Evans’s comments came one day after San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart said rates could rise as soon as the central bank’s April 26-27 meeting. Policy makers last week left the benchmark unchanged and pared the median projection for 2016 increases to two from four. Evans said so-called dot-plot projections for two rate hikes this year were for him “a pretty good setting.”

St. Louis Fed President James Bullard said in a Bloomberg interview in New York Wednesday that policy makers should consider raising interest rates next month amid a broadly unchanged economic outlook and prospects of inflation and unemployment exceeding targets.

Traders see the chances of an April move at 8 percent, according to futures data compiled by Bloomberg. The odds of a single 25-basis-point move by December are about 74 percent, climbing from 54 percent at the end of last month. The calculation assumes the effective fed funds rate will average 0.625 percent after the Fed’s next increase.

German Yields

Germany’s benchmark 10-year bund yield fell one basis point to 0.20 percent. The nation’s 30-year bund yielded 0.90 percent.

Germany’s debt agency allotted 810 million euros of bonds due in August 2046, versus its sales target of 1 billion euros. The securities were priced to yield 0.94 percent, compared with 0.77 percent at a previous 30-year auction in February.

The German government will sell 37 billion euros in bonds and 13.5 billion euros in bills between April and June, in line with the year-ahead outlook published in December, even while spending more on newly-arrived refugees, defense and national infrastructure, the Federal Finance Agency said in a statement.

Portugal allotted 1 billion euros of securities due in 2021 and 2030. The nation’s 10-year bond yield was little changed at 2.92 percent, while that on similar-maturity Spanish debt increased two basis points to 1.53 percent.

Europe’s bond markets will be closed March 25-28 for the Easter holiday.

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