Italian Bonds Fall on ECB Stimulus Debate; Greek Securities Rise

Italian government bonds fell after data showed euro-area inflation was quicker than previously estimated and German business confidence improved, reducing pressure on the European Central Bank to boost stimulus.

Italy’s 10-year securities dropped for the third time in four days as Prime Minister Matteo Renzi’s government prepared to face confidence votes in parliament this week. The ECB is ready to boost stimulus if the deflation risk increases, President Mario Draghi said yesterday. Greek bonds rose as the country’s partners were said to be working on the next review of its bailout. Portugal’s two-year yields dropped to the lowest in more than a month as the nation said it would buy back debt.

“It’s a marginal negative,” said Piet Lammens, head of research at KBC Bank NV in Brussels, referring to today’s inflation report. “The underlying picture for peripheral bonds remains positive but of course if you see from where we’ve come, a lot of this positive sentiment should be in the price. Cautiousness is the message from here.”

Italy’s 10-year yield climbed two basis point, or 0.02 percentage point, to 3.62 percent at 4:40 p.m. London time after declining to 3.53 percent on Feb. 19, the lowest since January 2006. The 4.5 percent bond due March 2024 fell 0.175, or 1.75 euros per 1,000-euro ($1,375) face amount, to 107.62.

Consumer prices rose an annual 0.8 percent in January, the European Union’s statistics office said, exceeding its initial Jan. 31 estimate of 0.7 percent. Still, it’s the fourth reading below 1 percent. The ECB aims to keep inflation at just under 2 percent. The Ifo institute said its German business climate index rose to 111.3 in February, the highest since July 2011, from 110.6 in January.

Deflation Risks

“We don’t have any evidence of people postponing their expenditure plans with a view to buying the same thing at lower prices, in other words we don’t see what is defined to be deflation,” Draghi said. “We are aware of the risks.”

The ECB’s governing council will have “the full set of information needed for deciding whether to act or not” by its March 6 meeting, when it will publish a 2016 inflation projection for the first time, Draghi told reporters in Sydney after a Group-of-20 meeting.

The Eonia market is pricing in about a 50 percent chance of a 10 basis-point cut in the ECB’s refinancing and deposit rates by mid-year, JPMorgan Chase & Co. strategists including Fabio Bassi in London wrote in a note dated Feb. 22. Eonia is a gauge of the cost for banks to borrow from each other overnight.

ECB Options

The Eonia forward curve based on dates of ECB meetings shows an ask price of 0.14 percent for June and 0.13 percent for July, according to ICAP Plc data.

Options for ECB officials include cutting the refinancing rate from its record-low 0.25 percent, ending the removal of excess liquidity from the ECB’s bond purchases, charging banks for keeping cash at the central bank overnight or printing money in a process known as quantitative easing.

“ECB talk is ever more accommodating,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris. “More ECB accommodation over the coming fortnight will support Italian and Spanish bonds.”

Renzi addressed the Senate in Rome today to introduce his 16-member cabinet and outline his strategy for government. A ballot is due at about 10 p.m., followed tomorrow by another confidence vote in the lower house.

Aid Package

Greek bonds advanced as European Union spokesman Simon O’Connor said the troika comprising the International Monetary Fund, the European Commission and the ECB resumed work today in Athens on their next review of the nation’s aid package.

Greece’s 10-year yields declined 14 basis points to 7.49 percent after dropping to 7.33 percent on Feb. 17, the lowest since May 2010.

Portuguese two-year yields fell 12 basis points to 2.21 percent after dropping to 2.17 percent, the least since Jan. 7.

Auctions to buy back government bonds due in October 2014 and October 2015 are to take place on Feb. 27, the Lisbon-based debt agency IGCP said in an e-mailed statement. The indicative amount for the sales is subject to market conditions, according to the statement.

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

German 10-year yields climbed two basis points to 1.68 percent after falling to 1.60 percent on Feb. 5, the lowest level since Aug. 1.

Italy is scheduled to sell as much as 2.5 billion euros of zero-coupon debt due in December 2015 and 1 billion euros of inflation-linked bonds maturing in September 2018 tomorrow

Italian bonds returned 3.3 percent this year through Feb. 21, Bloomberg World Bond Indexes show. Spain’s rose 3.8 percent and German securities gained 1.9 percent.

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