Italy’s Bonds Fall as Services Output Shrinks More Than Forecast

Italy’s 10-year government bonds declined after a report showed the nation’s service sector, based on a survey of purchasing managers, shrank more last month than economists forecast.

Italy’s 10-year yields approached a six-week high as the Repubblica newspaper reported former Prime Minister Silvio Berlusconi may consider withdrawing his support for the coalition government before a vote on whether to oust him from the senate following his conviction for tax fraud. Portugal’s 10-year yield reached a six-week high as a report said European Union and International Monetary Fund officials are discussing a precautionary program for the country.

“The big thing today is Italy underperforming,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in Paris. The PMI data “is quite worrying for Italian growth. We don’t see reforms in Italy, and without reform it’s hard to see any real recovery.”

Italian 10-year yields rose seven basis points, or 0.07 percentage point, to 4.42 percent at 4:17 p.m. London time. The rate reached 4.48 percent on Aug. 28, the highest since July 18. The 4.5 percent bond maturing in May 2023 fell 0.545, or 5.45 euros per 1,000-euro ($1,320) face amount, to 100.99.

Italy’s services index was at 48.8 from 48.7 in July, Markit Economics said. Analysts in a Bloomberg News survey forecast a reading of 49.9. A figure below 50 indicates contraction.

Yield Spread

The extra yield, or spread, investors demand to hold 10-year Italian bonds instead of similar-maturity German bunds widened eight basis points to 248 basis points. It reached this year’s low of 227 basis points on Aug. 19.

The spread has narrowed about 113 basis points since reaching this year’s high of 361 basis points on March 28 as improving economic data in the euro area boosted demand for riskier assets.

The rate on Spanish 10-year bonds increased four basis points to 4.51 percent after climbing five basis points yesterday. Spain plans to sell as much as 4 billion euros of securities maturing in 2018 and 2023 tomorrow.

Spain last sold its benchmark 10-year securities on July 18 at an average yield of 4.723 percent, compared with a rate of 4.765 percent at a previous auction on June 20.

A precautionary program for Portugal is one of the topics that Portuguese Vice Premier Paulo Portas and Finance Minister Maria Luis Albuquerque are discussing in meetings with EU and IMF officials, Diario Economico reported, without saying how it got the information.

Portugal’s 10-year yields climbed seven basis points to 6.77 percent after rising to 6.79 percent, the highest since July 22.

German Auction

German bunds were little changed before the European Central Bank announces its policy decision tomorrow.

Germany’s 10-year bund yielded 1.94 percent. The Finance Agency sold 4 billion euros of five-year notes at an average yield of 1 percent, the highest level since December 2011. That compared with a rate of 0.64 percent at the previous sale on Aug. 7. Investors bid for 1.5 times the amount of securities allotted versus 1.61 times last month.

The ECB will leave its key interest rate at a record-low 0.5 percent tomorrow, according to the median of 56 economist estimates in a Bloomberg News survey.

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

The yield spread between Sweden’s 10-year bonds and similar-maturity German bunds widened to 66 basis points, the most since 2003, as the Scandinavian nation sold 3.5 billion kronor ($529 million) of securities due in November 2023.

Italian bonds earned 3.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spanish securities returned 7.9 percent, while Germany’s lost 2.6 percent.

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