Italian Bonds Rise With Spanish Debt on Signs Economy Is Growing

Italian and Spanish government bonds climbed as factory orders rose in Germany, the euro area’s largest economy, underpinning demand for higher-yielding assets.

Italy’s 10-year yields fell to the lowest level in seven weeks after a government report showed the nation’s recession eased in the second quarter and as a European Central Bank official suggested policy rates may fall further, spurring optimism the recovery may gather momentum. Austria sold 770 million euros ($1 billion) of 10-year securities, while Greece auctioned six-month bills. Germany is scheduled to sell 4 billion euros of five-year debt tomorrow.

“Things are improving more quickly than people expected,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “This should support Italian and Spanish bond markets over the next few weeks.”

The yield on Italian 10-year bonds fell two basis points, or 0.02 percentage point, to 4.26 percent at 4:34 p.m. London time after reaching 4.22 percent, matching the lowest level since June 14. The 4.5 percent security due in May 2023 rose 0.17, or 1.70 euros per 1,000-euro face amount, to 102.275. Similar-maturity Spanish rates dropped three basis points to 4.57 percent.

German factory orders increased 3.8 percent from May, when they fell 0.5 percent, the Economy Ministry in Berlin said today. Analysts forecast a gain of 1 percent, according to the median of 42 estimates in a Bloomberg News survey.

‘Positive’ Data

“We expect growth in Germany to pick up and track that of the U.S., but with a lag,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Data from Germany has been positive. While short-dated rates are anchored because of the European Central Bank’s policy, longer-dated yields are likely to rise to reflect an improved economic outlook.”

The German 10-year yield increased two basis points to 1.70 percent after rising to 1.73 percent on Aug. 2, the highest level since July 5.

The rate will increase to 1.80 percent by the end of 2013 before climbing to 2 percent by mid-2014, according to the median estimates of economists surveyed by Bloomberg.

Italy’s gross domestic product contracted 0.2 percent from the first quarter, when it fell 0.6 percent, according to a preliminary report today by Istat, the national statistics institute in Rome. Economists predicted a decline of 0.4 percent, according to the median estimate in a Bloomberg survey.

Manufacturing Growth

The data added to signs that the euro-region economy is gathering pace. Recent reports also showed manufacturing in the 17-nation bloc expanded last month for the first time in two years and services output shrank at a slower pace, according to a survey of purchasing managers by London-based Markit Economics.

Yet, policy rates may stay low. The forward guidance used by the ECB suggests it hasn’t reached the lower bound of its key interest rates, the central bank’s Chief Economist Peter Praet said in comments on the website.

“We have not run out of ammunition,” he said. “Further cuts in policy rates remain an option for the ECB if the outlook on price stability so warrants.”

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

Austria sold bonds due in October 2023 at an average yield of 2.072 percent. It last auctioned the securities on June 4 at an average yield of 1.903 percent, compared with a record-low rate of 1.62 percent at a previous sale on May 7.

Greece allotted 813 million euros of bills due in February 2014 at an average yield of 4.20 percent, matching the rate at a previous auction on July 9.

Italian securities returned 3.8 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds lost 1.4 percent and Spain’s gained 6.7 percent.

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