Italy’s Bonds Fall as Yield Plunge Saps Demand at Auction

Italy’s government bonds fell as demand declined at an auction of 10-year bonds after borrowing costs slid to the lowest level in more than two years last week.

Italian 10-year yields climbed to a three-week high as the nation sold 3.5 billion euros ($4.75 billion) of the securities. Spanish bonds dropped as a government report showed gross domestic product shrank more than economists forecast. Germany’s bunds fell, pushing two-year note yields toward the highest in 10 months, as a decline in financial-institution borrowing from the European Central Bank sapped demand for the euro-region’s safest assets.

“The market is digesting the supply, there’s been quite a heavy chunk,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “The bid-to-cover ratio was somewhat lower. Overall, it’s a fairly natural reaction to see the market take a breather after the recent rally.”

Italian 10-year yields climbed 15 basis points, or 0.15 percentage point, to 4.32 percent as of 5 p.m. London time, after reaching 4.33 percent, the highest level since Jan. 9. The 5.5 percent security maturing in November 2022 fell 1.205, or 12.05 euros per 1,000-euro face amount, to 109.69. The rate dropped to 4.07 percent on Jan. 25, the least since Nov. 10, 2010, according to data compiled by Bloomberg.

The Rome-based Treasury sold 3.5 billion euros of 10-year debt at 4.17 percent, down from 4.48 percent at the previous auction on Dec. 28 and the lowest since Oct. 28, 2010. Investors bid for 1.32 times the amount of the 10-year debt allotted, down from 1.47 times on Dec. 28. The nation also sold 3 billion euros of notes due in 2017.

Spanish Data

Spanish bonds dropped as the National Statistics Institute said gross domestic product fell 0.7 percent last quarter from the previous three months, when it declined 0.3 percent. That’s more than the 0.6 percent contraction the Bank of Spain predicted on Jan. 23.

Spain’s 10-year yield added seven basis points to 5.23 percent.

Benchmark 10-year bund yields climbed to a four-month high after euro-area banks decreased three-month borrowing at the ECB even as they prepare to repay longer-term emergency loans.

Financial institutions borrowed 3.7 billion euros from the ECB, less than the 6.2 billion euros in three-month loans from the previous operation that need to be repaid tomorrow. Interest is linked to the average ECB benchmark rate, currently at 0.75 percent, over the period of the loan.

Euribor Futures

Euribor futures fell after the data, with the implied yield on the contract expiring in December rising three basis points to 0.56 percent. Three-month Euribor was at 0.23 percent today, according to data from the European Banking Federation.

“The fact it was a small number implies more money being drained out of the system,” said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland Group Plc in London. “It implies a tightening and higher rates at the front end,” he said, referring to shorter-maturity German securities.

Germany’s two-year note yields climbed two basis points to 0.29 percent. The rate reached 0.32 percent on Jan. 28, the highest level since March 21. The nation’s 10-year yield also rose two basis points, to 1.71 percent, after touching 1.73 percent, the highest since Sept. 17.

Italian bonds returned 2.1 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities gained 2.2 percent, while German bunds handed investors a loss of 1.9 percent.

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