Italian Bonds Gain Fourth Day After Auction; German Bunds Fall

Italian government bonds rose for a fourth day as borrowing costs fell when the nation sold 5 billion euros ($6.6 billion) of securities, underlining demand for the debt of so-called peripheral countries.

The extra yield investors demand to hold Italy’s 10-year bonds instead of Germany’s shrank below 2.5 percentage points for the first time since July 2011 as the sale added to optimism the debt crisis is easing. German bunds fell, with yields rising to an 11-week high, after the European Central Bank refrained from cutting interest rates yesterday and President Mario Draghi said the economy should gradually recover. Spain raised more than its target at an auction yesterday.

“Risk appetite remains positive,” said Richard McGuire, a senior rates strategist at Rabobank International in London. “There’s an ongoing risk-on move, underpinned yesterday by the very favorable outcome for the Spanish auctions. Draghi’s rhetoric highlighted the marked improvement in financial markets.”

Italy’s 10-year yield dropped four basis points, or 0.04 percentage point, to 4.12 percent at 4:26 p.m. London time after falling to 4.09 percent, the lowest level since November 2010. The 5.5 percent note due in November 2022 rose 0.295, or 2.95 euros per 1,000-euro face amount, to 111.345.

The spread over similar-maturity bunds narrowed as much as 12 basis points to 248 basis points.

The two-year rate slipped one basis point to 1.36 percent after sliding to 1.28 percent yesterday, the least since April 2010. The yield has declined 32 basis points since this week.

Italy Auction

Italy sold 3.5 billion euros of debt maturing in December 2015 at an average yield of 1.85 percent, down from 2.50 percent at the previous auction on Dec. 13. The Rome-based Treasury also allotted 1.5 billion euros of floating-rate notes.

Italian bonds also advanced on speculation a government led by Pier Luigi Bersani, the frontrunner in Italy’s election campaign, will maintain Prime Minister Mario Monti’s policies that were credited for stabilizing the bond market. Bersani’s spokesman Stefano Fassina said today the candidate may seek Monti’s support should he fail to win a Senate Majority.

Spanish 10-year yields dropped two basis points to 4.89 percent after falling to 4.84 percent, the least since March 1.

The country sold a combined 5.8 billion euros of bonds due between 2015 and 2026 yesterday, surpassing its maximum target of 5 billion euros.

‘Revised Target’

Spanish five-year yields will fall to 3 percent, Goldman Sachs Group Inc. strategists Francesco Garzarelli and Silvia Ardagna wrote today in a note to clients. That compares with a 3.50 percent estimate in December.

“Our revised target implies five-year Spain trading at around 230-250 basis points over Germany, where spreads were in early 2011,” they wrote.

Spain’s five-year yield fell five basis points to 3.48 percent today. The spread over similar-maturity German notes was 286 basis points.

Volatility on Belgian bonds was the highest in euro-region markets today, followed by those of Spain and Italy, according to measures of 10-year or equivalent-maturity debt, the yield spread between two- and 10-year debt, and credit default swaps.

Germany’s 10-year bund yield climbed two basis points to 1.58 percent after rising to 1.61 percent, the highest level since Oct. 25.

The ECB kept its benchmark interest rate at 0.75 percent yesterday in a unanimous decision a month after calls for a cut from some of its Governing Council. Policy makers maintained their so-far untapped offer to buy the bonds of governments who request assistance.

German bunds fell 1.5 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian debt returned 2.1 percent and Spanish securities gained 2.3 percent.

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