Italian Bonds Fall After Confidence Drops

Italian 10-year bonds fell for the first time in five days after data showed consumer confidence in the country declined this month to the lowest in more than 15 years, undermining demand for the nation’s assets.

Italy’s two-year notes fell for an eighth day as it sold 6.63 billion euros ($8.92 billion) of debt. Yields on the nation’s 10-year bonds climbed after falling to the lowest level in more than two years last week. Italy is due to hold elections on Feb. 24-25, and its central bank cut its 2013 growth estimate this month. German bunds dropped as the region’s biggest economy sold 2.07 billion euros of 12-month bills at a positive yield for the first time in seven months.

“There are some jitters surrounding Italy,” said Christian Lenk, a fixed-income analyst at DZ Bank AG in Frankfurt. “The stories surrounding the election are adding political pressure and might be weighing on the bonds.”

Italy’s 10-year bond yields climbed eight basis points, or 0.08 percentage point, to 4.21 percent at 4:45 p.m. London time, after falling to 4.07 percent on Jan. 25, the lowest level since November 2010. The 5.5 percent security maturing in November 2022 fell 0.685, or 6.85 euros per 1,000-euro face amount, to 110.57. Two-year note yields advanced eight basis points to 1.57 percent.

Italy’s confidence index dropped to 84.6, the lowest since the series began in 1996, from 85.7 percent in December, the Italian statistics office Istat said in Rome today. Economists had predicted an increase to 86, according to the median of 12 forecasts in a Bloomberg News survey.

Italian Growth

Italian GDP will probably contract 1 percent this year, the Bank of Italy said on Jan. 18 in its economic bulletin. That compares with a July estimate of a 0.2 percent reduction.

Italy sold 4 billion euros of zero-coupon notes maturing in December 2014 and 2.63 billion euros of inflation-linked bonds due in 2018.

Germany’s 10-year yield climbed six basis points to 1.70 percent, after reaching 1.71 percent, the highest level since Sept. 17.

Germany sold 12-month securities at an average yield of 0.1319 percent, the Bundesbank said in a statement today. That’s the highest auction yield since October 2011, according to data compiled by Bloomberg.

Two-year German note yields rose above the rate on similar-maturity U.S. securities for the first time since February 2012. Two-year German yields were 0.30 percent, while U.S. rates were 0.29 percent.

LTRO Repayments

The German note yields earlier jumped to a 10-month high of 0.32 percent, extending an increase last week after the European Central Bank said lenders planned to repay more loans borrowed under the credit-boosting Longer-Term Refinancing Operations than analysts estimated.

While measures to stem the region’s debt turmoil have helped reduce Italy’s 10-year bond yields by more than 300 basis points from their 2012 high, the ECB predicts the currency bloc’s economy will shrink 0.3 percent this year. ECB President Mario Draghi said last week that the “jury is still out” on whether investor optimism can be reflected in economic momentum.

“There is a lot of focus on the LTRO and the repayments and that should continue to influence the market this week,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “Things in the euro-region appear to be improving but we need to see it confirmed in the economic data.”

Yield Spread

Investors should buy Spanish two-year notes or 10-year bonds while selling similar-maturity Italian debt, betting the yield difference, or spread, between the two securities will narrow, interest-rate strategists at Citigroup, including London-based Robert Crossley, wrote in a Jan. 25 note to clients.

“We expect the hunt for yield and fear of underperformance of peers to drive the risk-on move further, and by extension, benefit higher-yielding Spanish bonds more than their Italian counterparts,” they wrote.

Spanish 10-year bonds yielded 104 basis points more than similar-maturity Italian securities today, compared with an average of 10 basis points less over the past five years, according to closing-price data compiled by Bloomberg.

Volatility on Finnish bonds was the highest in euro-area markets today, followed by those of the Netherlands and Austria, according to measures of 10-year or similar-maturity debt, the yield spread between two- and 10-year securities, and credit-default swaps.

German bunds handed investors a loss of 1.7 percent this month through Jan. 25, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French bonds dropped 1.5 percent and Italian securities returned 2.2 percent.

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