Italian Bonds Drop Second Day Before Auctions; German Bunds Rise

Italian government securities declined for a second day as the euro-area’s biggest sovereign-debt market prepared to auction bonds this week for the first time since July.

Italy’s 10-year yield climbed toward a three-week high amid tensions over former Prime Minister Silvio Berlusconi’s political future. The nation will sell 4 billion euros ($5.35 billion) of inflation-linked and zero-coupon debt tomorrow, 8.5 billion euros of bills the next day and an unspecified amount of bonds on Aug. 29. Spain will also sell bills tomorrow. German bunds rose along with Austrian and Dutch securities as a slide in U.S. durable-goods orders spurred demand for safer assets.

“What’s driving Spain and Italy is the prospect for a resumption of issuance,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “Spreads have narrowed quite strongly because of the lack of issuance over the past weeks and maybe there will be profit taking and spread widening as markets prepare themselves.”

Italian 10-year yield rose six basis points, or 0.06 percentage point, to 4.39 percent at 4:18 p.m. London time after climbing to 4.41 percent on Aug. 22, the highest since July 31. The 4.5 percent security due in May 2023 fell 0.475, or 4.75 euros per 1,000-euro face amount, to 101.235.

Spread Widens

The extra yield investors demand to hold the securities instead of similar-maturity bunds widened 10 basis points to 249 basis points after contracting to 227 basis points on Aug. 19, the narrowest since July 2011.

The Cabinet of Italian Prime Minister Enrico Letta meets today to discuss streamlining the country’s political administration. Members of Berlusconi’s People of Liberty party have threatened to topple the government if the billionaire media-magnate is ousted from the Senate following a conviction for tax fraud.

A crisis in the government would push the 10-year yield spread beyond 300 basis points “in a few days,” New York University Professor Nouriel Roubini said in an interview today with La Repubblica newspaper.

“The fear of a Berlusconi return is rattling Italian bonds,” said David Keeble, head of fixed-income strategy at Credit Agricole Corporate & Investment Bank in New York. “We have a nagging doubt there will soon be some unsettling news. Bunds are scooping up the difficulties in Italy.”

Spanish Bonds

Spain’s 10-year yield climbed one basis point to 4.47 percent. The government will sell as much as 4 billion euros of 84- and 259-day bills tomorrow.

German 10-year bonds advanced for the first time in four days as the U.S. Commerce Department said durable goods orders fell 7.3 percent in July, the biggest decline since August 2012.

Germany’s 10-year bund yield fell four basis points to 1.90 percent after climbing to 1.98 percent on Aug. 23, the highest since March 2012. Similar-maturity Austrian yields slipped four basis points to 2.30 percent and those in the Netherlands fell four basis points to 2.29 percent.

The benchmark bund yields should climb toward the “psychologically important” 2 percent level amid euro-area sentiment data this week but may fail to close above it, Bayerische Landesbank’s Daheim said.

The Ifo institute’s business climate index for Germany, based on a survey of 7,000 executives, increased to 107 this month from 106.2 in July, according to a Bloomberg News survey before the data is released tomorrow.

Eurex Halted

Trading in bund futures contracts was limited as Eurex, Europe’s largest derivatives market, halted trading for about an hour after a technical glitch affected its systems. Trading resumed at 9:20 a.m. Frankfurt time, Eurex said.

The number of contracts traded today was 199,160, set for the lowest since May 27. Daily trading volume in bund futures averaged 612,396 last week, according to data compiled by Bloomberg. Financial markets in the U.K. are shut today for a public holiday.

Germany allotted 2.42 billion euros of one-year bills at an auction today at an average yield of 0.097 percent, compared with 0.051 percent at a previous sale on July 22.

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

Italian bonds returned 3.9 percent this year through Aug. 23, according to Bloomberg World Bond Indexes. Spanish securities earned 7.8 percent, while Germany’s lost 2.6 percent.

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