Italy’s Bonds Drop as Political Tensions Deter Buyers at Auction

Italy’s government bonds fell amid speculation that traders who deal directly with the Rome-based Treasury bought most of the securities at today’s auction as the nation’s political tensions deterred other buyers.

Italian 10-year bonds dropped for a second day before Prime Minister Enrico Letta meets President Giorgio Napolitano to discuss the government’s prospects for survival. Former premier Silvio Berlusconi’s allies this week threatened to step down from the coalition if he is expelled from the Senate. Italy auctioned a combined 6 billion euros ($8.1 billion) of five- and 10-year debt. German bunds rose with Dutch securities as European stocks declined, boosting demand for safer assets.

“The issue is that it was a dealer-led affair and there wasn’t much real-money buying,” said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland Group Plc in London. “The dealers have had to take too much of the debt so we’re likely to see some of that coming back in to the market. For us, the risk-reward for Italian debt at these levels is not that compelling.”

Italy’s 10-year yield climbed eight basis points, or 0.08 percentage point, to 4.42 percent at 4:44 p.m. London time, extending this week’s increase to 13 basis points. The rate jumped 10 basis points yesterday, the most since Sept. 5. The 4.5 percent bond maturing in May 2023 fell 0.645, or 6.45 euros per 1,000-euro face amount, to 100.97.

Italian Auctions

Italy sold 3 billion euros of 4.5 percent bonds maturing in March 2024 at an average yield of 4.5 percent, compared with 4.46 percent at a previous auction on Aug. 29. The Treasury allotted 3 billion euros of securities due in December 2018 at 3.38 percent, the same as last month.

Governments conduct auctions through primary dealers, who are banks or brokers obliged to bid directly for the bonds, before distributing them to other investors, creating a market for the securities.

“The Italian developments are an issue for the markets and the bonds will be under pressure until they are sorted out,” said Ralf Umlauf, head of floor research at Helaba Hessen-Thueringen in Frankfurt.

Italian bonds have dropped this week as People of Liberty lawmakers led by Berlusconi threatened to resign en masse if the former premier’s tax-fraud conviction leads the Senate to oust him. Letta’s Democratic Party, the largest group in parliament, has said the expulsion is required under a law passed last year.

Political Turmoil

“As soon as I land in Rome, I will go to Napolitano to discuss how we can go ahead,” Letta told reporters in New York yesterday, ending a four-day visit to the U.S. marred by political bickering back home.

Germany’s 10-year bund yield declined six basis points to 1.78 percent after reaching 1.77 percent, the lowest since Aug. 13. The rate on Dutch 10-year securities dropped five basis points to 2.18 percent.

The Stoxx Europe 600 Index of shares fell 0.6 percent.

German 10-year bunds were set for their biggest weekly gain since July 2012 after European Central Bank President Mario Draghi said this week that officials may consider pumping more cash into the banking system if required to stop borrowing costs from rising. ECB Executive Board member Joerg Asmussen said yesterday that policy will remain expansive.

Germany’s 10-year yield has dropped 17 basis points this week, the most since the period ended July 6, 2012.

An index of executive and consumer sentiment in the euro area rose for a fifth month in September to 96.9 from a revised 95.3 in August, the European Commission in Brussels said today. That beat the median estimate of 96 in a Bloomberg survey of 26 economists.

Debt Crisis

While the report adds to signs the economy is recovering, the region is still grappling with a jobless rate at a record 12.1 percent amid the sovereign-debt crisis that started four years ago in Greece.

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

Italian bonds returned 4.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s gained 8.9 percent, while German securities lost 1.7 percent

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