Italian Bonds Rise on Rate-Cut Bets; Greek Yield Drops Below 8%

Italy’s government bonds rose, with 10-year yields falling to the lowest level since June, amid speculation the European Central Bank will cut interest rates as soon as its meeting next week.

Spain’s securities advanced for a second day as Bank of America Corp., UBS AG and Royal Bank of Scotland Group Plc all forecast that policy makers will lower borrowing costs this month after data yesterday showed inflation slowed to the least since 2009. Greek 10-year yields dropped below 8 percent for the first time since June 2010 amid bets the ECB led by President Mario Draghi will conduct a further longer-term refinancing operation to help revive growth.

“The inflation data does increase a prospect of a rate cut and another round of LTRO,” said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. “We are likely to get both although it may not happen next week. If the ECB moves at the November meeting, it would appear a bit hasty and Draghi may have to backtrack a bit on some of what the ECB said about the recovery.”

Italy’s 10-year yield fell four basis points, or 0.04 percentage point, to 4.09 percent at 4:49 p.m. London time after dropping to 4.08 percent, the lowest level since May 29. The 4.5 percent bond due in March 2024 rose 0.37, or 3.70 euros per 1,000-euro ($1,349) face amount, to 103.795.

Spanish 10-year yields declined five basis points to 3.98, the least since May 3. Two-year rates fell 10 basis points to 1.42 percent, having dropped 22 basis points this week.

Record Low

Spain’s bonds extended gains after Fitch Ratings revised the nation’s outlook to stable from negative and affirmed its rating at BBB.

Bank of America, UBS and RBS all predict the ECB will cut its main refinancing rate by 25 basis points on Nov. 7. BNP Paribas SA, Societe Generale SA, JPMorgan Chase & Co. and Scotiabank forecast a reduction in December, when the central bank will publish new economic projections. The ECB last lowered its benchmark rate on May 2 to a record 0.5 percent.

Since taking over as head of the Frankfurt-based ECB in November 2011, Draghi has cut the refinancing rate, flooded the banking system with more than 1 trillion euros of three-year loans and pledged in July 2012 to do “whatever it takes” to safeguard the single currency.

“There’s a good chance of a rate cut next week,” said Peter Osler, head of interest-rate strategy at broker Marex Spectron Group Ltd. in London. “It comes down to the deflationary trends which I think are building. Shorter-dated bonds are likely to outperformed longer maturities.”

Rate Outlook

The implied yield on Euribor contracts expiring in December 2014, a measure of the outlook for three-month money-market rates, dropped as much as five basis points to 0.355 percent, the lowest since May 23.

Greece’s 10-year yield fell as much as 18 basis points to 7.90 percent, the lowest since June 2, 2010. The rate surged to 44.21 percent in March 2012 as the government forced losses on investors as part of a debt swap that saw it issue new securities at less than 30 percent of face amount.

German benchmark 10-year yields rose two basis points to 1.69 percent. Two-year rates were little changed at 0.11 percent after declining to 0.087 percent, the lowest level since July 22.

Euro-area inflation unexpectedly slowed to 0.7 percent in October, the ninth straight month it has been less than the ECB’s 2 percent ceiling, European Union data showed yesterday. A separate report yesterday showed unemployment climbed to a record 12.2 percent in September.

Belgian Yields

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

Belgian two-year yields dropped one basis point to 0.26 percent, having fallen seven basis points this week. Similar-maturity French rates also declined one basis point, to 0.28 percent, having slid 10 basis points since Oct. 25.

Italy’s bonds returned 6.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s returned 11 percent, while Germany’s lost 0.9 percent.

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