Italy 10-Year Bonds Rise a 5th Week on Stimulus Bets; Bunds Fall

Italian 10-year bonds rose for a fifth week, with yields dropping to the lowest in more than seven years, after the European Central Bank cut interest rates and pledged further stimulus to support growth.

Spain’s securities also rallied, with the 10-year yield dropping below 4 percent for the first time since October 2010. Yields on two-year Italian notes fell below 1 percent for the first time on record after the ECB cut its main refinancing rate on May 2 and signaled it was open to a negative deposit rate. Italian bonds also advanced as the swearing-in of a new prime minister ended nine weeks of political deadlock. German 10-year bund yields fell to the lowest since July.

“The ECB decision to cut rates creates a supportive environment for the periphery,” said Luca Cazzulani, a senior rates strategist at UniCredit SpA in Milan. “The ECB is going to keep liquidity abundant. The rally in Italian and Spanish bonds can continue.”

Italian 10-year yields dropped 24 basis points, or 0.24 percentage point in the week, to 3.82 percent at 4:45 p.m. London time yesterday after falling 70 basis points in the four weeks ended April 26. They slid to as low as 3.68 percent yesterday, the least since February 2006. The 5.5 percent security due November 2022 rose 1.925, or 19.25 euros per 1,000-euro ($1,314) to 113.52.

Two-year yields dropped 25 basis points in the week to 1.04 percent percent after sliding to 0.942 percent, the lowest on record.

ECB Rates

Spain’s 10-year yield fell 24 basis points to 4.04 percent. The rate slid to 3.94 percent yesterday, the least since May 2010. The nation’s two-year rate declined 38 basis points to 1.55 percent after dropping to 1.46 percent yesterday, the least since April 2010.

Spanish and Italian bonds led gains in Europe’s government securities after ECB President Mario Draghi said on May 2 the central bank was “technically ready” to charge banks to park their excess liquidity with the central bank overnight and would address any unintended consequences if it decided to act.

The ECB lowered its main refinancing rate by a quarter percentage point to 0.5 percent at its policy meeting in Bratislava, Slovakia, and cut its marginal lending rate, which banks use for overnight credit, to 1 percent from 1.5 percent.

New Italian Prime Minister Enrico Letta assembled a coalition government by forging an alliance with former premier Silvio Berlusconi. The nation was in a political deadlock since inconclusive elections on Feb. 24-25.

Retail Sales

Yields on Portugal’s 10-year bonds dropped to 5.5 percent, the least since October 2010, and were 37 basis points lower on the week. German 10-year bunds gained four basis points to 1.24 percent, even as they slid to 1.15 percent on May 2, the lowest since July 23.

Euro-area retail sales dropped 0.1 percent in March from a 0.3 percent slide the previous month, a report on May 6 is forecast to show. Spain is scheduled to sell three-, five- and 10-year government debt on May 9.

Italian securities gained 5.2 percent this year through May 2 according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds returned 8.9 percent and German debt earned 1.4 percent.

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