Italy’s 10-Year Government Bonds Advance After Auction

Italy’s government bonds rose, pushing 10-year yields down from the highest level in three months, after demand increased at the nation’s first debt auction since inconclusive election results.

Benchmark securities trimmed their first monthly decline since July as the Rome-based Treasury sold 6.5 billion euros ($8.51 billion) of five- and 10-year bonds, matching its target. Spanish and Portuguese bonds also gained as a euro-area report showed economic confidence increased in February, adding to optimism the debt crisis can be contained. German bunds were little changed after 10-year yields dropped to the lowest level in eight weeks.

“The auction has cleared with strong demand and better-than-expected yield levels,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. There is “very strong demand for the 10 year in particular, which is encouraging. It shows that fears of a rapid disintegration of investor sentiment toward Italy may be overstated.”

Italy’s 10-year yield fell nine basis points, or 0.09 percentage point, to 4.80 percent at 5 p.m. London time after rising to 4.96 percent, the highest level since Nov. 15. The 5.5 percent bond due November 2022 gained 0.655, or 6.55 euros per 1,000-euro face amount, to 105.705.

The yield jumped as much as 44 basis points yesterday, the biggest increase since Dec. 19, 2011, and has climbed 50 basis points this month.

Demand Increases

Investors bid for 1.65 times the 4 billion euros of new 10-year bonds that Italy sold, up from 1.32 times at the previous auction of the maturity on Jan. 30. The so-called bid-to-cover ratio for the five-year notes was 1.61, versus 1.3 last month. The 10-year securities were sold at an average yield of 4.83 percent, compared with 4.17 percent in January.

The auction came as European Union leaders put pressure on Italy’s political parties to form a unity government committed to budget rigor. EU Economic and Monetary Commissioner Olli Rehn said it is “important to get a functioning government.”

Silvio Berlusconi, a three-time prime minister ousted in November 2011 during an escalation of the debt crisis, gained a blocking minority in the upper house in the elections. The billionaire’s re-emergence and rise of former comedian Beppe Grillo risked plunging Italy into weeks of paralysis.

Grillo said today that lawmakers from his 5 Star Movement won’t vote confidence in any government.

‘Really Unclear’

“Things are really unclear with regard to the election results and it’s difficult to pin down what’s going to happen,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “It won’t take much for the market to sell Italian bonds more, and if the prospect of a second vote becomes greater then that will probably happen. The longer it drags on for the greater the risks will be.”

The bonds of so-called peripheral nations rallied as the European Commission said its index of euro-area executive and consumer sentiment improved to 91.1 this month from a revised 89.5 in January. Economists forecast an increase to 89.9, according to a Bloomberg News survey.

Spanish 10-year yields fell 13 basis points to 5.23 percent after jumping 20 basis points yesterday. Portugal’s 10-year rate declined seven basis points to 6.49 percent.

Germany’s 10-year yield closed at 1.45 percent after dropping to 1.42 percent, the lowest level since Jan. 2.

Italian government bonds returned a loss of 1.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German debt slid 0.5 percent, while Spanish securities gained 1.3 percent.

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