Italy’s Bonds Gain on Cyprus Optimism; Spanish Securities Rise

Italian bonds rose, erasing their decline since euro-area policy makers proposed an unprecedented levy on Cypriot bank deposits, as investors bet the turmoil in the region’s third-smallest economy will be contained.

Spanish securities advanced for a second day as the nation sold 4.5 billion euros ($5.81 billion) at a debt auction, exceeding its target. German bunds gained, with 10-year yields falling toward an 11-week low, as the Cypriot central bank denied a report that Cyprus Popular Bank Plc would be shut and proceeds from the sale of assets returned to depositors.

“The contagion risks from Cyprus have been deemed less immediately relevant,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “Spain and Italy have stabilized as people have realized there isn’t any particular implication for those countries.”

Italian 10-year yield fell five basis points, or 0.05 percentage point, to 4.59 percent at 5 p.m. London time, after dropping nine basis points yesterday. The rate had climbed 13 basis points on the first two days of this week. The 5.5 percent bond due in November 2022 rose 0.375, or 3.75 euros per 1,000-euro face amount, to 107.42.

Spanish 10-year yield declined 10 basis points to 4.88 percent after falling as much as 13 basis points, the biggest decline since March 8.

The Cypriot Cabinet is discussing an investment fund intended to help raise the 5.8 billion euros needed to activate emergency loans, Athens News Agency reported. Finance Minister Michael Sarris said in Moscow that while Russia won’t lend money to Cyprus, it’s looking at investment in the energy industry.

Cyprus Bonds

Cyprus’s government bonds rose for a second day, with the yield on the 4.625 percent security due February 2020 falling 15 basis points to 12.06 percent. The rate is still 339 basis points higher this week. The bid price was 66.534 while the offer price was 69.259.

The German 10-year bund yield fell two basis points to 1.37 percent after declining to 1.34 percent on March 19, the lowest level since Jan. 2.

The ECB said it will cut Cypriot banks off from emergency funds, known as ELA, after March 25 unless the Mediterranean nation agrees on a bailout with the European Union and International Monetary Fund.

The Central Bank of Cyprus hasn’t been informed of any decision to close Cyprus Popular Bank, central bank spokesperson Aliki Stylianou said in a statement to state-run CYBC.

Spanish Auction

Spain sold a combined 4.51 billion euros of two-, five- and 10-year securities, more than its target of 4 billion euros. The 10-year bonds were auctioned at 4.898 percent, compared with 4.917 percent at the previous sale on March 7. The two-year yield dropped to 2.275 percent from 2.54 percent on Feb. 21.

“All lines were well received despite the recent turmoil across the EMU periphery’s debt,” Annalisa Piazza, a fixed-income analyst at Newedge Strategy in London, wrote in a note to clients. “Dealers probably hope that the Cyprus bailout will be sorted out soon, given that even the ECB has warned the country that the ELA funding would be suspended early next week, should an agreement fail to be reached.”

France sold 8 billion euros of notes due 2015 and 2018, as well as 1.48 billion euros of inflation-linked securities. Ireland auctioned 500 million euros of three-month bills at an average yield of 0.24 percent.

German bunds handed investors a loss of 0.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds returned 3.4 percent, while French securities fell 0.2 percent.

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