Spanish Bonds Fall With Italian Securities Before Summit

Spain’s government bonds fell for the first time in three days as ministers from the 17-member euro area gather in Brussels today to discuss aid to Cyprus and Greece as they struggle to contain the region’s debt crisis.

Italy’s 10-year yields climbed toward the highest level in eight weeks on speculation elections in the nation this month and in Cyprus will disrupt efforts to reform their economies. German 10-year yields were about three basis points from the lowest level in two weeks as the government sold six-month bills. France auctioned 7.59 billion euros ($10.2 billion) of securities due in 12 months or less.

“Volatility is slightly increasing and we have some issues in some peripheral countries,” said Patrick Jacq, a senior fixed-income strategist BNP Paribas SA in Paris. “In the near-term horizon, core markets are well supported versus the peripherals. There’s limited pressure on Italy and Spain.”

Spain’s 10-year yield rose six basis points, or 0.06 percentage point, to 5.42 percent at 4:36 p.m. London time after falling nine basis points during the previous two days. The 5.4 percent security due in January 2023 dropped 0.46, or 4.60 euros per 1,000-euro face amount, to 99.82.

Cyprus has been in talks to become the fifth recipient of rescue aid, though euro-area officials are awaiting a new leadership that may be more amenable to demands such as privatizing state assets. Nicos Anastasiades, who heads the main opposition party, is poised to win the Feb. 17 election, according to three final polls.

Cyprus Package

A failure to agree on a package for Cyprus would throw into jeopardy progress achieved by policy makers to put the nation’s finance on a surer footing, ECB Executive Board Member Joerg Asmussen said. He told Handelsblatt he expects a decision by the end of March.

Polls taken before Italy’s Feb. 24-25 elections show the vote may fail to deliver a governing majority, with former premier Silvio Berlusconi narrowing the lead of front-runner Pier Luigi Bersani.

“Investors are a little bit more cautious,” said Elwin de Groot, a market economist at Rabobank Nederland in Utrecht, the Netherlands. “There’s a chance they might end with a hung parliament in Italy, which means there could be some kind of political paralysis, which is not good from an investor perspective. In this environment, we could see a widening of spreads and a strong demand for bunds.”

Italy’s 10-year yield climbed six basis points to 4.62 percent after increasing to 4.63 percent on Feb. 8, the highest since Dec. 14.

Spreads Widen

The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity German bunds rose six basis points to 381 basis points, extending this month’s increase to 31 basis points. The Italian spread over Germany also widened six basis points, to 300 basis points.

Germany sold 3.39 billion euros of six-month bills at an average yield of 0.02 percent, compared with minus 0.009 percent at a previous auction on Jan. 7, and the first positive rate since June.

Germany’s 10-year bund yield was little changed at 1.61 percent after declining to 1.58 percent on Feb. 8, the lowest level since Jan. 25. The two-year yield was little changed at 0.18 percent.

Risks Contained

Inflation risks in the euro region are contained, allowing monetary policy “to remain accommodative,” European Central Bank President Mario Draghi said at last week’s policy meeting. The ECB kept its main refinancing rate at a record-low 0.75 percent at the Feb. 7 gathering.

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

German bonds handed investors a loss of 1.4 percent this year through Feb. 8, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities returned 0.5 percent and Spanish debt gained 1.2 percent.

Before it's here, it's on the Bloomberg Terminal.