Italian Bonds Fall for Second Day as Consumer Confidence Wanes

Italy’s government bonds dropped for a second day as a report showed consumer confidence worsened this month, encouraging investors to reduce their holdings after gains that pushed yields to a four-month low.

The nation’s 10-year securities had their first two-day decline in two weeks after separate data showed euro-area services and manufacturing unexpectedly slowed in October. Spanish two-year notes snapped a seven-day advance that had pushed yields down 25 basis points. German bund yields reached a 10-week low. Investors should hold a smaller proportion of government securities in their portfolio than recommended in their benchmark index, Goldman Sachs Group Inc. said.

“Peripheral bonds have come a long way and are now settling into a range as some in the market looked for an excuse to take profits,” said Martin Munksgaard, a trader at Danske Bank A/S in in Copenhagen, referring to the debt of the euro area’s lower-rated nations. “We still expect the improved growth outlook and policy support to help peripheral bonds outperform. Those who don’t have them in their portfolios are not doing very well.”

Italy’s 10-year yield climbed three basis points, or 0.03 percentage point, to 4.15 percent at 4:22 p.m. London time after declining to 4.09 percent yesterday, the lowest since June 5. The 4.5 percent bond due March 2024 fell 0.235, or 2.35 euros per 1,000-euro ($1,380) face amount, to 103.315.

Confidence Declines

An index of Italian consumer confidence dropped to 97.3, the least since June, from a revised 100.8 in September, the statistics office said. A composite gauge of euro-area manufacturing and services based on a survey of purchasing managers fell to 51.5 from 52.2 in September, Markit Economics said. The median estimate in a Bloomberg News survey was for an increase to 52.4.

Spain’s two-year note yields increased three basis points to 1.58 percent, while 10-year rates climbed one basis point to 4.14 percent.

German bonds were little changed with 10-year yields at 1.77 percent after dropping to 1.74 percent, the lowest level since Aug. 13.

Government securities around the world have been supported this month amid speculation a fiscal dispute that closed the U.S. government will deter the Federal Reserve from slowing debt purchases. The U.S. central bank buys $85 billion of assets each month to put downward pressure on borrowing costs.

‘Contradicting Forces’

German bunds “have been trapped by two contradicting forces --accommodative policy and improved growth outlook,” said Luca Jellinek, head of European rates strategy at Credit Agricole Corporate & Investment Bank in London. “If positive data continues at a solid pace, we are inclined to think the risk to German yields is on the upside.”

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

Investors should stay underweight government bonds during the next year as growth quickens, Goldman Sachs said.

“Bond yields are in line with our estimates of current fair value and we see the near-term risk-reward as balanced,” analysts including Francesco Garzarelli, co-head of macro and markets research in London, wrote today in a note to clients. “Longer term, we continue to expect yields to rise as growth improves. We remain neutral over three months and underweight over 12 months.”

Italian bonds returned 6.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s gained 10 percent, while Germany’s lost 1.5 percent.

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