Italian Bonds Climb as Production Rises; Spanish Securities Gain

Italy’s government bonds advanced for a third day after a report showing the nation’s industrial output increased in October added to optimism the nation is recovering from its debt crisis.

The extra yield investors demand to hold Italian 10-year securities instead of German bunds shrank to the narrowest in more than two years after the government in Rome held a buy-back auction, reducing its financing needs for 2014 and 2015. Spain’s 10-year yield dropped to the lowest level in a month, while benchmark German bonds were little changed.

“Activities in the euro region are picking up at a gradual pace,” said Luca Jellinek, head of European rates strategy at Credit Agricole Corporate & Investment Bank in London. “It’s not a strong recovery but recovery nonetheless. Short-dated yields will stay anchored.”

The yield on Italian 10-year bonds dropped seven basis points, or 0.07 percentage point, to 4.06 percent at 4:43 p.m. London time. The 4.5 percent security due in March 2024 rose 0.54, or 5.40 euros per 1,000-euro ($1,377) face amount, to 103.975. Spanish 10-year yields declined seven basis points to 4.04 percent after sliding to 4.02 percent, the lowest since Nov. 7.

Italy has canceled a bond sale that was previously scheduled for Dec. 12 as its cash position improved after the country sold 22.3 billion euros of government inflation-linked bonds aimed at retail investors in November.

Output Rises

Italy’s industrial production rose 0.5 percent after gaining 0.2 percent in September, the Italian Statistics Institute said. The median estimate in a Bloomberg News survey was for a gain of 0.2 percent. A separate report showed economic growth was unchanged in the third quarter, the first time it hasn’t shrank since the three months through June 2011.

The yield spread between Italy’s 10-year bonds and German bunds shrank seven basis points to 2.22 percentage points, the narrowest since July 2011. The equivalent Spain-Germany spread contracted nine basis points to 2.18 percentage points, the least since June 2011.

The Rome-based Treasury bought back 3.99 billion euros of bonds and floating-rate notes maturing in December 2014, and March, April and September 2015 at an auction today. It also bought inflation-linked securities due in 2017.

“Spain, which has hit its issuance target for the year, and Italy are benefiting from positive supply dynamics heading into the year-end,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “The spread tightening might have come a long way, but I wouldn’t currently fight it.”

Spanish Sale

Spain sold 2.85 billion euros of one-year bills at an average yield of 0.883 percent, compared with 0.678 percent at a previous auction on Nov. 19. The Madrid-based Treasury also allotted 1.69 billion euros of six-month securities at 0.686 percent, while Greece auctioned 1.625 billion euros of similar-maturity debt to yield 4.15 percent.

European Central Bank President Mario Draghi said today that governments should push ahead with crucial reforms including completion of the banking union, adoption growth-friendly fiscal consolidation and the easing of restrictions in labor and product markets.

German 10-year yields were at 1.84 percent, Austria’s declined two basis points to 2.15 percent, and similar-maturity Dutch rates fell one basis point to 2.15 percent.

Germany’s two-year note yields fell one basis point to 0.22 percent before the nation auctions 5 billion euros of the securities tomorrow.

German Repayment

The country last sold two-year debt on Nov. 13 at an average yield of 0.1 percent, compared with 0.19 percent at a previous auction on Oct. 16. Germany is due to repay 15 billion euros of 0.25 percent notes maturing on Dec. 13, according to data compiled by Bloomberg.

Belgium’s debt management agency said it will sell 30 billion euros of bonds next year, the lowest issuance since 2007. While the return on Belgian bonds this year was 0.1 percent, they outperformed their peers from so-called non-core countries including Austria, the Netherlands and France. The Belgian 10-year yield fell one basis point to 2.42 percent.

Italian bonds earned 7.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s returned 11 percent while German securities lost 1.7 percent.

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