Italian Bonds Fall Third Week on Slowing Recovery; Bunds Advance

Italy’s government bonds fell for a third week as reports showed the nation’s business confidence worsened and euro-area services and manufacturing grew less than economists forecast, sapping demand for higher-yielding assets.

The extra yield investors demand to hold the nation’s 10-year debt instead of similar-maturity German bunds widened for the first week in a month amid signs the region’s recovery is losing momentum. German bonds advanced for a second week as investors sought the region’s safest investments. Italy is scheduled to sell as much as 2.25 billion euros ($3.1 billion) of two-year notes next week along with bills and bonds.

“Data that trailed forecasts and the fact that there will be more Italian supply coming to the market next week caused Italian bonds to lose ground,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Our view is that the economic recovery will continue to improve, albeit at a slow pace, and that should keep the Italian-German bond spread contained.”

Italy’s 10-year yield climbed six basis points, or 0.06 percentage point, this week to 4.22 percent after declining to 4.09 percent on Oct. 23, the lowest since June 5. The 4.5 percent bond due in March 2024 fell 0.49, or 4.90 euros per 1,000-euro face amount, to 102.655.

The extra yield investors demand to hold Italy’s 10-year securities instead of similar-maturity German bonds widened 13 basis points to 247 basis points, the first increase since the week ended Sept. 27.

Confidence Declines

An index of Italian consumer confidence dropped to 97.3 this month, the least since June, from a revised 100.8 in September, the statistics office said Oct. 24. 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 same day.

The bonds of Europe’s lower-rated nations also underperformed bunds as the European Central Bank said Oct. 23 the definition of capital it uses to stress test banks will be stricter than that in an imminent review of their assets.

While the ECB confirmed it will require lenders to have a capital ratio of 8 percent, what qualifies as capital will change over the course of a three-part assessment, it said.

‘Less Attractive’

“There is some expectation building up about the ECB’s asset-quality review,” said Michael Leister, a senior fixed-income strategist at Commerzbank AG in London. “Some are worried that the result of the review may make it less attractive for banks to hold government debt. Since Italian and Spanish bonds are held primarily by their local banks, such a result will hit them the most.”

Spanish bonds rose this week though pared gains after the ECB statement. The nation’s 10-year yield closed the week 10 basis points lower at 4.16 percent after dropping as much as 16 basis points.

German 10-year yield declined eight basis points to 1.76 percent after falling to 1.74 percent on Oct. 24, the lowest level since Aug. 13.

Italy’s Treasury will sell two-year zero-coupon notes on Oct. 28, 750 million euros of inflation-linked bonds the same day, as well as bills on Oct. 29 and bonds the following day.

Italian bonds returned 6.4 percent this year through Oct. 24, according to Bloomberg World Bond Indexes. Spanish securities rose 10 percent, while Germany’s lost 1.5 percent.

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