Italian Bonds Decline as Lawmakers Struggle to Form Government

Italian 10-year bonds fell for a third day as Prime Minister-designate Enrico Letta consults with other political leaders as he struggles to form a new government to end a political impasse.

The nation’s securities declined even as the country auctioned 8 billion euros ($10.4 billion) of six-month bills at a record-low yield. Benchmark German bunds extended a second weekly gain as the Bundesbank criticized the European Central Bank’s bond-buying program in an opinion for the nation’s constitutional court. The ECB will lower its key interest rate to 0.5 percent next month, according to the median estimate in a Bloomberg News survey of analysts.

“We have really had an extremely strong rally and it was obvious there was going to be some profit taking,” said Michael Markovich, head of global interest-rate research at Credit Suisse Group AG in Zurich. “We have to see how the political process in Italy will evolve. If the current prime minister isn’t successful in forming a government we will need new elections so some uncertainty remains. If the ECB don’t deliver anything there will be negative price action in the periphery.”

Italy’s 10-year yield rose three basis points, or 0.03 percentage point, to 4.09 percent at 2:41 p.m. London time. The rate dropped to 3.89 percent on April 23, the lowest since October 2010. The 5.5 percent security due in November 2022 fell 0.28, or 2.80 euros per 1,000-euro face amount, to 111.33.

The nation’s two-year yield increased one basis point to 1.32 percent, up from 1.125 percent on April 23, the least since Bloomberg began compiling the data in 1993.

Italian Auction

The Italian Treasury sold six-month bills at an average yield of 0.503 percent, the Bank of Italy said. That’s down from a rate of 0.83 percent at a previous auction of similar-maturity debt on March 26.

Spain’s bonds erased an advance after Prime Minister Mariano Rajoy said he would seek two more years to tackle Europe’s widest budget deficit.

The Cabinet today approved a plan to cut the shortfall of 10.6 percent of gross domestic product back within the European Union limit of 3 percent by 2016 instead of 2014 as demanded by the European Commission, according to an e-mailed statement.

Spain’s 10-year yield was little changed at 4.28 percent, after earlier tumbling to 4.25 percent. It still headed for its biggest weekly slide since the period ended March 2.

German Bunds

The rate on similar-maturity German bunds dropped three basis points to 1.21 percent, extending this week’s decline to four basis points.

Germany’s top court has scheduled hearings for June 11 and 12 to look into cases challenging the nation’s participation in the European Stability Mechanism and ECB policies. Central Bank President Mario Draghi last year announced a so-far unused plan of unlimited bond purchases for countries that request a bailout and commit to an overhaul of their economies.

“Our view is that this story is very important and can see notable spread widening and flight to bunds,” wrote Michael Michaelides and Harvinder Sian, rates strategists at Royal Bank of Scotland Group Plc, in an e-mailed note. “Just how far we sell-off depends on news flow in the next couple of days; we watch in particular for political comments from Germany but words from Draghi should also be expected to soothe markets.”

The ECB published data showing how much money savers withdrew from the euro region’s banks after a botched attempt to tax Cypriot savers as part of a European Union-led bailout. Bank deposits fell 3.9 percent in March, the data showed.

Volatility Gauge

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

Norway’s sovereign wealth fund, the world’s largest, reduced its holdings in Austrian, French and Japanese government bonds in the first quarter.

Norway increased its investments in government bonds from the U.S., the Netherlands and Germany in its $728 billion Government Pension Fund Global, the Oslo-based investor said today. Government securities made up 59.7 percent of the fund’s fixed-income investments at the end of the quarter and were the worst-performing fixed-income assets, returning 0.6 percent, it said.

Italian securities gained 3.6 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds returned 0.9 percent, and Spanish debt earned 7.3 percent.

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