Italy Yield Premium Over Spain Reaches 18-Month High; Bunds Gain
The extra yield investors demand to hold Italian 10-year bonds over Spain’s widened to the most in 18 months as Italy’s cost of borrowing for three years climbed to the highest since October at a debt auction.
Italian 10-year yields were about five basis points from a two-month high amid speculation a vote on whether to expel former premier Silvio Berlusconi from the Senate could destabilize Enrico Letta’s coalition government. The Rome-based Treasury sold a combined 5.5 billion euros ($7.32 billion) of securities due in 2016 and 2028. German (GDBR10) 10-year bunds rose along with Finnish and Dutch securities as investors sought the region’s safest assets.
“Significant underperformance of Italy against Spain reflects that even though Italy is the more liquid market it has obstacles from a political perspective,” said Norbert Aul, a European rates strategist at Royal Bank of Canada in London. “The ongoing Senate debate about the political future of Berlusconi is there at the forefront.”
Italy’s 10-year yield was little changed at 4.53 percent as of 5 p.m. London time. The rate rose to 4.58 percent on Sept. 6, the highest since July 4. The price of the 4.5 percent security due in May 2023 was at 100.15.
The rate on similar-maturity Spanish bonds dropped two basis points, or 0.02 percentage point, to 4.46 percent, lower than its Italian counterpart for a third day. The yield difference between Spain’s and Italy’s 10-year securities increased two basis points to six basis points, after reaching seven, the widest since March 2, 2012.
The Italian Senate committee has agreed unanimously to hold a vote on whether to expel Berlusconi from the chamber on Sept. 18, Senator Giuseppe Cucca said today.
Italy sold 4 billion euros of notes maturing in November 2016 at an average yield of 2.72 percent, compared with 2.33 percent at an auction of similar-maturity debt on July 11.
Investors bid for 1.52 times the amount of 2016 securities allotted today, compared with a bid-to-cover ratio of 1.36 on the 2028 bonds. The Treasury also sold 2.76 billion euros of floating-rate notes maturing in 2018.
The “mixed” outcome of the auction may be due to investors favoring debt covered by the European Central Bank’s Outright Monetary Transactions program, according to Richard McGuire, senior fixed-income strategist at Rabobank International in London.
Under the as-yet-unused OMT, the central bank will buy debt due in one to three years of member nations that meet certain criteria.
“One might infer that against the backdrop of elevated political tensions in Italy, the promise of OMT support becomes more valuable - hence, the notably better results for the shorter-dated issuance here,” Rabobank’s McGuire wrote in an e-mailed note. “Italy’s underperformance versus Spain looks set to continue near term.”
Industrial production in Italy unexpectedly fell 1.1 percent in July, according to data today. Economists had forecast a 0.3 percent increase, according to the median of 16 estimates in a Bloomberg News survey.
Benchmark German 10-year bund yields fell five basis points to 2 percent. The yield rose above the 2 percent level on Sept. 5 for the first time since March 2012.
“Eye-catching yield levels are attracting investor interest again,” said Rainer Guntermann, a rates strategist at Commerzbank AG in Frankfurt. “It provides the market with support and we think the recovery has a bit further to go.”
Volatility on German bonds was the highest in euro-area markets today followed by those of France and Portugal (GSPT10YR), according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
Finland’s 10-year yield fell four basis points to 2.23 percent, while the rate on similar-maturity Dutch bonds decreased four basis points to 2.37 percent. French (GFRN10) 10-year yields dropped three basis points to 2.56 percent, after reaching 2.53 percent, the lowest level since Sept. 4.
Portugal’s 10-year bonds declined for a third day, with the yield rising as much as 10 basis points to 7.24 percent, the highest level since July 17.
The yield has climbed about 2 percentage points since May 22 when Federal Reserve Chairman Ben S. Bernanke told Congress that the central bank could cut the pace of its bond purchases if policy makers saw indications of sustained economic growth.
“Portuguese government bonds have come under disproportionate pressure during the global bond selloff,” said Michael Gavin, a strategist at Barclays Capital Inc. in New York. “The most plausible interpretation of the recent run-up in Portuguese bond yields and spreads is that bondholders are pricing some limited risk” of a debt-restructuring deal inflicting losses on investors.
Italian securities returned 3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s earned 7.9 percent, while German bonds lost 2.9 percent, the indexes show.