Italy’s Yields Approach Five-Month Low as Belgian Bonds Advance

Italy’s 10-year yield approached a five-month low as Prime Minister Enrico Letta said turmoil in former Premier Silvio Berlusconi’s PDL party will boost government stability and the nation sold five-year notes in an exchange auction.

Belgium’s securities rallied as the country canceled its last bond auction of the year. German bunds advanced before a report this week that economists said will show euro-area output, based on a survey of purchasing managers, expanded for a fifth month in November. Yields fell last week as a report confirmed that inflation in the 17-nation euro region slowed to the least in four years. France’s bonds were little changed after it sold 6.6 billion euros ($8.9 billion) of bills.

“We saw a decent performance from the five-year bond out of Italy, which is a small positive,” said Michael Leister, a senior interest-rate strategist at Commerzbank AG in London. “The Italian Treasury have shown they have quite a large toolkit at their disposal. Berlusconi is not really a topic for the market now.”

Italy’s 10-year yield fell two basis points, or 0.02 percentage point, to 4.07 percent at 4:38 p.m. London time, after dropping on Nov. 7 to 4.04 percent, the least since May 28. The 4.5 percent bond due in March 2024 rose 0.165, or 1.65 euros per 1,000-euro face amount, to 103.895.

Italy’s government bonds returned 7.2 percent this year through Nov. 15, according to Bloomberg World Bond Indexes, on rising investor confidence in the nation’s ability to control its budget while withstanding political tension. Spain’s securities earned 11 percent and Germany’s lost 1.1 percent.

Forza Italia

“We are not anymore in a position to push down the government,” Berlusconi said Nov. 16 at a meeting of his People of Liberty party in Rome after Deputy Prime Minister Angelino Alfano decided not to follow him into a new group called Forza Italia. Berlusconi’s attempt to topple the government in October failed when a portion of the PDL party, led by Alfano, defied him.

Letta said today that fiscal consolidation is a duty and that his actions have set conditions for growth next year. The rupture in the PDL party will “create a more clear situation,” he said.

Italy sold 3.3 billion euros of 3.5 percent bonds due in 2018 via the exchange auction. The Treasury said last week it wouldn’t offer five-year debt at a regular sale on Nov. 28 due to reduced cash needs. The rate on the securities dropped two basis points to 2.64 percent today.

Limited Power

“The former power of Berlusconi to scare markets and investors has diminished significantly,” said Christian Lenk, a fixed-income analyst at DZ Bank AG in Frankfurt. “As far as investors perceive it the fear that Berlusconi can really put on the market is rather limited.”

The yield on Belgium’s 10-year bonds decreased five basis points to 2.39 percent, adding to a drop of three basis points last week. The country’s debt securities returned 1.7 percent in the past month, cutting the 2013 loss to 0.3 percent.

Belgium canceled the Nov. 25 bond auction after raising 3.25 billion euros from the sale of its remaining 25 percent stake in BNP Paribas Fortis SA, the country’s largest bank, to BNP Paribas SA last week. The nation is bidding to keep gross public debt from surpassing one year’s worth of economic output, as agreed with the European Commission.

Target Exceeded

Belgium had sold 42.3 billion euros of bonds by the end of October, just short of last year’s record 42.9 billion euros and exceeding its original target of 40 billion euros for the year, according to debt-agency data. So far, Belgium’s debt agency has bought back more than 5.7 billion euros of debt maturing next year.

Germany’s 10-year bund yield dropped two basis points to 1.68 percent, having touched 1.65 percent on Oct. 31, the lowest since Aug. 8.

A composite gauge of euro-region manufacturing and services activity rose to 52 this month from 51.9 in October, according to a Bloomberg News survey of analysts before the data is released on Nov. 21. A reading above 50 indicates expansion. The European Commission in Brussels will say the same day that euro-area consumer confidence improved in November, according to a separate survey.

The output report “will give a better indication on the outlook for the euro-zone economy,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “The latest data for the euro zone have not been so strong, and we need a confirmation of the upward trend. All in all, I expect some volatility on bund yields near term.”

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

French 10-year bonds yielded 2.17 percent, while the rate on similar-maturity Irish debt was little changed at 3.53 percent.

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