German Bunds Slide as Italian Debt Rallies on U.S. Budget Deal

Germany’s bonds slumped, with 10-year yields rising the most in more than three months, after U.S. lawmakers passed a bill undoing income-tax increases that threatened growth in the world’s largest economy.

Dutch, Finnish and French securities also fell as progress in avoiding the so-called fiscal cliff undermined demand for refuge assets. Italian bonds rallied, with 10-year yields dropping to the lowest level since December 2010, as the budget agreement spurred investor appetite for higher yields. Germany auctioned 4.15 billion euros ($5.5 billion) of two-year notes, with the sale resulting in a yield above zero for the first time since October.

“The compromise on the U.S. fiscal cliff is dominating risk sentiment,” said Rainer Guntermann, a fixed-income strategist at Commerzbank AG in Frankfurt. “It’s a pro-risk environment and bund yields should correct a bit higher.”

Germany’s 10-year yield rose 13 basis points, or 0.13 percentage point, to 1.44 percent at the 5 p.m. close of trading in London, the biggest increase since Sept. 14. The 1.5 percent bond due September 2022 fell 1.145, or 11.45 euros per 1,000-euro face amount, to 100.515.

The U.S. House of Representatives voted in favor of the Senate’s budget legislation as Republican lawmakers abandoned efforts to add spending cuts to the bill, removing an impediment to growth. The 257-167 bipartisan vote last night ended a yearlong impasse over how to avert $600 billion in tax increases and spending cuts that were due to take effect yesterday.

‘Remain Nervous’

“While the consensus reached by the Democrats and Republicans has avoided a politically initiated crisis there is still much work to be done,” Mike Turner, head of strategy at Aberdeen Asset Management Ltd. in Edinburgh, wrote in a note to clients. “Until a long-term plan is agreed which reduces the annual budget deficit to less than 3 percent of GDP, investors are likely to remain nervous.”

Germany’s two-year note yield climbed five basis points to 0.031 percent after rising to 0.042 percent, the highest level since Dec. 3. The rate dropped to a record minus 0.097 percent on Aug. 2.

The nation sold two-year securities today at a yield of 0.01 percent, compared with minus 0.01 percent at the previous auction on Dec. 5. Investors bid for 1.5 times the amount allotted, compared with 1.9 times last month.

‘Very Low’

The bid-to-cover ratio “was lower than when the bond was last issued,” Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London, wrote in an e-mail to clients. “The significant risk-on tone seen this morning following the U.S. fiscal cliff news may well be making investors unwilling to invest in German debt at these still very low yields.”

Italy’s 10-year bond yields declined 22 basis points to 4.28 percent after falling to 4.27 percent, the lowest level since Nov. 23, 2010. The extra yield investors demand to hold the securities instead of similar-maturity German bunds shrank to as little as 283 basis points, the narrowest since March 21.

The so-called spread has “finally” fallen below 287 basis points, Italian caretaker Prime Minister Mario Monti wrote in a Twitter post. On Dec. 3, he said he hoped the yield difference would contract below that level.

Spanish 10-year yields fell 23 basis points to 5.03 percent, the lowest level since March 13.

Euro-area manufacturing output shrank more than initially estimated in December, adding to signs a recession will extend into this year. The Purchasing Managers’ Index fell to 46.1 from 46.2 in November, below an initial estimate of 46.3 published on Dec. 14. Gauges for Germany, France and Italy were all below 50 last month, indicating a contraction, separate reports showed.

Most Volatile

Volatility on Dutch debt was the highest among euro-area nations tracked by Bloomberg, followed by Finland and Belgium, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Dutch 10-year yields climbed 13 basis points to 1.63 percent, while similar-maturity Finnish yields rose 12 basis points to 1.64 percent and France’s increased eight basis points to 2.08 percent.

German bonds returned 4.5 percent last year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities climbed 6 percent and Italy’s rose 21 percent.

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