Italian, Spanish Bonds Rise Third Week as Economic Data Improves

Italian and Spanish government bonds advanced for a third week after reports showed factory output in the euro area expanded for the first time in two years and the number of people unemployed in Germany declined.

Italy’s 10-year securities extended their weekly winning streak to the longest since May after European Central Bank President Mario Draghi said economic indicators suggest the region is past the worst of its longest-ever recession. Italy’s bonds rallied even after the nation’s top court upheld former Premier Silvio Berlusconi’s conviction for tax fraud, threatening the stability of the ruling coalition. German bunds were little changed after yields reached a three-week high.

“We’ve had some very good macro figures and ultimately if you get decent growth in the periphery, and that’s still a big if, who cares what happens to individual politicians?” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London. “If you get the sense there’s a possibility of decent growth then clearly these bonds should do better.”

Italy’s 10-year yield fell 15 basis points, or 0.15 percentage point, this week to close at 4.25 percent, the lowest level since June 19. The 4.5 percent bond maturing in May 2023 rose 1.155, or 11.55 euros per 1,000-euro ($1,327) face amount, to 102.29.

Similar-maturity Spanish yields dropped five basis points this week to 4.57 percent.

‘Further Improvement’

“Confidence indicators have shown some further improvement from low levels and tentatively confirm the expectation of a stabilization in economic activity,” Draghi said at a press conference in Frankfurt on Aug. 1 after the ECB left its main refinancing rate at a record-low 0.5 percent.

A euro-area manufacturing index based on a survey of purchasing managers rose to 50.3 in July, surpassing the 50 mark for the first time since July 2011, Markit Economics said Aug. 1. The number of people out of work in Germany dropped by a seasonally adjusted 7,000 to 2.93 million in July, the Federal Labor Agency said July 31.

Berlusconi’s conviction for tax fraud, confirmed on Aug. 1 by Italy’s highest court, increased tensions in parliament and risks undermining Prime Minister Enrico Letta’s government. Members of Berlusconi’s party had threatened to bring down the coalition if the conviction was confirmed.

Germany’s 10-year yield was little changed this week at 1.65 percent after rising to 1.73 percent yesterday, the highest level since July 5.

Italian bonds returned 3.3 percent this year through Aug. 1, according to Bloomberg World Bond Indexes. Spanish securities gained 6.3 percent, while German bunds lost 1.3 percent.

Austria is scheduled to auction 770 million euros of 10-year bonds on Aug. 6, and Germany will sell 4 billion euros of notes maturing in April 2018 the following day.