Italian Bonds Fall Amid Political Power Struggle

Italy’s government bonds fell with Portuguese and Greek securities as stalling German inflation and the threat of a government collapse in Europe’s biggest debt market damped a rally in higher-yielding securities.

German bunds rose along with Dutch and Austrian bonds as investors sought the region’s safer assets. A measure of inflation expectations in Germany dropped to the lowest level in 20 months. Italian bonds declined even as the nation sold 3.5 billion euros ($4.78 billion) of three-year notes at a record-low yield. Italy’s Prime Minister Enrico Letta is seeking to shore up his 10-month-old government amid a challenge from his party’s head Matteo Renzi.

“Government bond spreads are probably looking stretched,” said Neil Williams, chief economist in London at Hermes Fund Managers Ltd., which oversees about $43.5 billion. “The European Central Bank will ultimately have to stop holding its nose to deflation risk and capitulate on some version of quantitative easing.”

Italy’s 10-year yield rose two basis points, or 0.02 percentage point, to 3.75 percent at 2:56 p.m. London time after dropping to 3.66 percent yesterday, the lowest level since February 2006. The 4.5 percent bond due in March 2024 fell 0.135, or 1.35 euros per 1,000-euro face amount, to 106.555.

Spread Widens

The additional yield investors demand to hold the securities instead of 10-year German bunds widened seven basis points to 208 basis points after shrinking to 192 basis points on Jan. 9, the narrowest since July 2011.

Greek 10-year yields climbed 28 basis points to 7.69 percent, while similar-maturity Portuguese rates rose three basis points to 5.05 percent. Spain’s were little changed at 3.65 percent.

Letta’s ability to command a majority of lawmakers has been placed in doubt after two months of uneasy collaboration with Renzi. Renzi said in a speech at a party meeting in Rome today that Italy cannot afford to live in uncertainty.

“The situation in Italy is putting pressure on the periphery, and Italy and Spain are underperforming,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen, referring to the bonds of Europe’s most indebted nations. “The consumer-price index numbers confirm we are in a very low inflation environment. It’s difficult for the market to really sell off in bunds.”

Italy Auction

Italy sold three-year notes at an average yield of 1.41 percent, down from 1.51 percent at the previous auction on Jan. 13, and an record low, according to data compiled by Bloomberg starting in 1985. The nation also sold 4 billion euros of bonds due in 2021 and 2044.

Italian and Spanish five- to seven-year securities are attractive, according to Akira Takei, the Tokyo-based chief fund manager for global bonds at Mizuho Asset Management Co., which oversees the equivalent of $39 billion. The ECB’s pledge to buy the debt of struggling nations that request assistance means “it’s like a free lunch,” Takei said yesterday.

“We’re heavily overweight both on Italy and Spain,” he said. “The shape of the yield curves is still so steep. The ECB is not going to let Italy or Spain default.”

German Inflation

Germany’s 10-year yield fell five basis points to 1.67 percent after climbing to 1.72 percent yesterday, the highest level since Jan. 30. Dutch 10-year yields dropped four basis points to 1.90 percent and Austria’s declined five basis points to 1.98 percent.

German bonds were the most volatile in euro-area debt markets today, followed by those of Finland and Austria, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.

Consumer prices in Germany, calculated using a harmonized European Union method, rose 1.2 percent in January from a year earlier, matching December’s increase, the Bundesbank said in Frankfurt. They declined 0.7 percent from the previous month.

Germany’s 10-year break-even rate, a measure of inflation expectations derived from the yield difference between index-linked bonds and conventional securities, was 1.34 percentage point, headed for the lowest closing level since May 2012.

The ECB said its survey of professional forecasters cut estimates for inflation in the euro area, citing appreciation of the shared currency, commodity prices, weakness in the economy and labor markets. Inflation will be 1.1 percent this year from 1.5 percent in a previous survey, the central bank said.

Italy’s bonds returned 2.6 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s securities rose 3.3 percent and Germany’s gained 1.7 percent.

(Corrects third paragraph of story to show Williams said “ultimately.”)
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