Italian, Spanish Spread Over Bunds Shrinks to Least in Two Years

Italy’s and Spain’s 10-year yield premium over benchmark German bunds shrank to the least in two years on speculation the euro-area economy is edging back to growth as recession in the two nations ease.

Reducing borrowing costs has been a priority for Italy and Spain after concern that the two nations would struggle to curb their debts pushed yields toward levels that led Greece, Ireland and Portugal to ask for international aid. Recessions in Italy and Spain eased last quarter, while analysts predict a euro-area report tomorrow will show gross domestic product in the region expanded for the first time since 2011.

“We’ve had pretty good data from Europe,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “Italian and Spanish GDP was better, the general macro picture has improved. Periphery government bonds are performing well,” he said, referring to the securities of Europe’s high debt and deficit nations.

Italy’s 10-year yield rose seven basis points, or 0.07 percentage point, to 4.23 percent at 4:37 p.m. London time, while benchmark German rates climbed 11 basis points to 1.81 percent, narrowing the difference between the two to 242 basis points. It touched 237 basis points, the least since July 22, 2011. The spread widened to a euro-era record of 575 basis points on Nov. 9, 2011.

Spain’s yield gap over Germany slid nine basis points to 269 basis points after reaching 265 basis points, the tightest since Aug. 16, 2011. It surged to 650 basis points in July last year on speculation the debts of the nation’s banks and regions would prompt the country to seek a bailout.

Record Yield

Ten-year Italian yields surged to a record 7.48 percent in November 2011 as Europe’s debt crisis led to the resignation of former Prime Minister Silvio Berlusconi. The yield fell more than two percentage points last year as his successor, Mario Monti, imposed austerity measures and European Central Bank President Mario Draghi pledged to do what was needed to preserve the euro. While current premier Enrico Letta relaxed some austerity, he has also focused on reducing the spread.

“It’s the demonstration that Italy is a country that can be trusted once more,” Letta said of improvements in the yield difference at an Aug. 9 press conference in Rome. “The trust that Italy has reacquired from markets must push us, not to stop and enjoy this trust and rest easy.”

The yield difference narrowed this year even after Berlusconi was convicted of tax fraud, creating tensions in Letta’s coalition government. Berlusconi’s party has rallied around its leader, possibly seeking a presidential pardon and threatening a mass resignation of deputies in parliament.

Italian GDP

Italian gross domestic product fell 0.2 percent in the three months through June, the smallest quarterly contraction since 2011, as business and consumer confidence registered gains. Spain’s GDP fell 0.1 percent in the same period, after dropping 0.5 percent in the first quarter, the Madrid-based National Statistics Institute said on July 30.

Euro-area GDP increased 0.2 percent in the second quarter, snapping six quarters of contraction, according to a Bloomberg News survey before the report tomorrow.

Italian government bonds earned 4.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s returned 7.3 percent, while German securities dropped 1.4 percent.

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