Italy’s Bonds Advance Second Day on Recovery Prospects

Italy’s government bonds advanced for a second day as optimism the global economy is recovering boosted demand for higher-yielding assets.

The nation’s 10-year yields dropped to the lowest level since inconclusive parliamentary elections on Feb. 24-25, as concern eased that political paralysis will drive up borrowing costs. Spain’s 10-year securities rose for a sixth day, the longest run of gains since August, as the Dow Jones Industrial Average extended a record high. German bunds were little changed before the European Central Bank sets interest rates tomorrow.

“It seems that investors have decided to hold on to Italian bonds and wait and see,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “They are being supported by generally good risk sentiment and stock markets have been doing pretty well the last couple of days, so that’s underpinning the bounce in Italy and Spain.”

Italy’s 10-year yields fell eight basis points, or 0.08 percentage point, to 4.66 percent at 4:43 p.m. London time, after reaching 4.59 percent. The rate dropped 14 basis points yesterday. The 5.5 percent security maturing in November 2022 gained 0.61, or 6.10 euros per 1,000-euro ($1,300) face amount, to 106.88.

Yields on Italy’s 10-year bonds jumped to 4.96 percent on Feb. 27, the most since November, after the election produced a hung parliament, threatening political paralysis and a reversal of outgoing Prime Minister Mario Monti’s austerity measures.

The Dow rose for a fourth day, gaining as much 0.5 percent to 14.320.65.

Bond Movers

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

Italy is preparing to sell new 30-year bonds, Maria Cannata, head of the nation’s debt agency, said today at the Euromoney Bond Investors Congress in London.

The bond market reacted “quite well” to the elections, she said. “The market is convinced a good solution will be found, even if the situation is quite complex now.”

Spain may sell new 10-year bonds via banks as soon as mid-year, and is considering a new 15-year security, deputy debt chief Ignacio Fernandez-Palomero Morales told reporters at the same conference.

Yields on Spanish 10-year bonds fell three basis points to 5.01 percent. The rate has fallen from 5.59 percent on Feb. 26, the highest level since Dec. 10.

Spain is scheduled to sell a total of 5 billion euros of bonds maturing in two, five and 10 years tomorrow. It last auctioned the 10-year securities on Feb. 21 at an average yield of 5.20 percent.

Economy Contracts

German bunds erased an earlier decline as a report showed the euro-area economy contracted the most in almost four years in the fourth quarter, boosting the case for more monetary stimulus from the ECB, which next decides on policy tomorrow.

Gross domestic product in the 17-nation bloc fell 0.6 percent from the third quarter, the European Union’s statistics office in Luxembourg said today, confirming an initial estimate published on Feb. 14. The economy has shrunk for three quarters, a trend that will continue in the first three months of 2013, according to a separate Bloomberg survey.

Germany’s 10-year bund yielded 1.46 percent after rising as much as three basis points. The nation auctioned an additional 3.1 billion euros of five-year notes at an average yield of 0.45 percent. It last sold the securities on Feb. 6 at 0.68 percent.

The ECB will maintain its benchmark interest rate at a record-low 0.75 percent at tomorrow’s meeting, according to the median estimate of 61 economists in a Bloomberg survey.

French Auctions

France’s 30-year bonds fell for a second day as the nation’s debt agency said it’s considering selling a new benchmark. The yield on the 4.5 percent securities maturing in April 2041 climbed three basis points to 3.18 percent.

France may sell new 30-year bonds, Maya Atig, deputy chief executive of Agence France Tresor, said at the Euromoney conference.

The Paris-based debt agency is due to sell as much as a combined 7.5 billion euros of 2018, 2022 and 2027 bonds tomorrow.

Italian bonds returned 6.7 percent in the 12 months through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 3.8 percent, the indexes showed.