Italian Bonds Rally Most in Five Months as Bunds Advance on Fed

Italy’s bonds rose this week, with 10-year yields falling the most since April, as Europe’s government securities advanced amid bets central banks will maintain stimulus that boosts demand for fixed-income assets.

Italian 10-year yields slid to the lowest level in a month after a motion to halt expulsion proceedings against former Premier Silvio Berlusconi in the nation’s Senate was rejected. Benchmark German bund yields dropped to the lowest since August as the U.S. Federal Reserve refrained from reducing the pace of its asset purchases. Spain’s 10-year yield spread over Germany narrowed to the least in two years after euro-area investor confidence rose. Germany holds federal elections tomorrow.

“There was a Fed-induced move which pushed fixed-income higher,” said Christian Lenk, a fixed-income analyst at DZ Bank AG in Frankfurt. “There’s also a relief rally because everyone was looking at the Berlusconi vote and worrying that was going to destabilize the government. The focus is off that for now and that’s helped Italian bonds.”

Italy’s 10-year yield fell 29 basis points, or 0.29 percentage point, this week to 4.29 percent as of 5 p.m. London time yesterday. That’s the steepest drop since the period ended April 5. The 4.5 percent security due in May 2023 climbed 2.225, or 22.25 euros per 1,000-euro ($1,352) face amount, to 102.005.

Spread Narrows

Spain’s 10-year yield was at 4.30 percent, down 19 basis points since the end of last week. The spread investors demand to hold Spanish 10-year bonds instead of similar-maturity German bunds narrowed 16 basis points in the week to 236 basis points after dropping to 234 yesterday, the narrowest since July 1, 2011.

The Fed maintained its monthly purchases of $85 billion of bonds and mortgage-backed debt on Sept. 18, saying it needs more evidence of an improvement in the U.S. economy. Analysts had forecast policy makers would cut Treasury purchases by $5 billion to $40 billion.

In Italy, the wrangling over Berlusconi has threatened Enrico Letta’s government by splitting the ruling coalition. Lawmakers in People of Liberty, the second-biggest party in the alliance, have threatened to resign if Berlusconi loses his seat. Letta’s Democratic Party, the largest group in parliament, has said Berlusconi’s expulsion is required by law.

Italy is scheduled to auction five- and 10-year securities on Sept. 27.

German Yields

Germany’s 10-year bund yield fell three basis points in the week to 1.94 percent after falling to 1.85 percent on Sept. 19, the lowest since Aug. 30. French 10-year yields slid nine basis points to 2.45 percent, while the rate on similar-maturity Belgian bonds also dropped nine basis points, to 2.73 percent.

Merkel, who has governed Germany in an alliance with the pro-business Free Democrats since 2009 may have to enter a coalition with the Social Democrats, according to polls before the election.

The ZEW Center for European Economic Research in Mannheim said on Sept. 17 that its index of German investor and analyst expectations rose to 49.6 in September from 42 in August. An indicator of euro-area investor confidence increased to 58.6 from 44, the highest since September 2009.

Markit Economics will say on Sept. 23 its gauges of manufacturing and services activity in the euro region, based on surveys of purchasing managers, expanded this month, Bloomberg surveys of analysts showed.

Italy’s securities returned 4.4 percent this year through Sept. 19, according to Bloomberg World Bond Indexes. Spain’s advanced 8.9 percent, while Germany’s lost 2.3 percent.

Before it's here, it's on the Bloomberg Terminal.