Italian Bonds Gain Amid Sale Demand; Bunds Advance on Ukraine

Italy’s government bonds rose, pushing 10-year yields to a record low, amid speculation demand from local investors at a sale of inflation-linked debt will be reinforced by overseas funds as the economy improves.

German bunds advanced, with benchmark 10-year yields falling to the lowest since May, as signs that tensions in Ukraine are escalating spurred demand for the euro region’s safest securities. Austrian, Dutch and French securities also rallied. Economists predict a euro-area report tomorrow will confirm inflation slowed to the least in four years, backing the case for more stimulus from the European Central Bank.

“In the past, it always went great, there is no other word for it,” said Peter Schaffrik, head of European rates strategy at Royal Bank of Canada in London, referring to Italy’s debt sale to retail investors. “In an environment where yields are low and the international community is still underinvested, there’s a real attraction to go into the markets that offer yield pick-up and Italy is one of them.”

Italy’s 10-year yield fell seven basis points, or 0.07 percentage point, to 3.11 percent at 4:55 p.m. London time after dropping to 3.104 percent, the least since Bloomberg started collecting the data in 1993. The 4.5 percent bond maturing in March 2024 rose 0.575, or 5.75 euros per 1,000-euro face amount, to 111.955.

Overseas investors are increasingly returning to Italian bonds and diversifying their holdings, according to debt agency chief Maria Cannata. Purchasers from non-euro area countries such as the U.K. and Scandinavian nations are “important,” in addition to the “very strong” presence of U.S. investors, Cannata said yesterday in an interview in her office in Rome .

BTP Italia

The sale of the inflation-linked bond, known as BTP Italia, is scheduled to run through April 17, and comes five months after the record offering of a similar maturity. The sale is being done in two stages with the first part reserved for retail investors.

Italian 10-year yields have fallen by more than half since July 2012 when ECB President Mario Draghi pledged to do whatever it takes to preserve the euro. Demand also increased amid speculation the central bank will add stimulus to boost an inflation rate that’s a quarter of its 2 percent target.

German bonds gained for the third time in four days as Ukraine’s government said it identified Russian military in the town of Slovyansk, eastern Ukraine. Ukrainian units are undertaking an offensive to dislodge militants from towns in its eastern Donetsk region as Russia’s prime minister Dmitry Medvedev said the country risks civil war.

Worst Standoff

The crisis has led to the worst standoff since the Cold War between Russia and between western nations. The U.S. and the European Union are deliberating deepening sanctions against Russia, which they blame for stoking the unrest.

Germany’s 10-year yield fell five basis points to 1.47 percent, the lowest level since May 31. Austria’s dropped six basis points to 1.70 percent and France’s declined seven basis points to 1.95 percent.

Germany’s bonds also rose as a report showed investor confidence in the nation deteriorated this month. The ZEW Center for European Economic Research said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, declined to 43.2 from 46.6 in March.

Germany is scheduled to sell 4 billion euros of 10-year debt tomorrow. The nation last sold bunds maturing in February 2024 on March 19 at an average yield of 1.58 percent, compared with 1.64 percent at a previous auction in February.

‘Further Stimulus’

“Prospects of further stimulus by the ECB combined with low realized inflation should continue to be supportive of the 10-year area” of the German yield curve, Subhrajit Banerjee, a London-based strategist at HSBC Holdings Plc, wrote in a note today. HSBC recommended investors buy German 10-year bunds versus selling Austria’s 1.75 percent bond due in October 2023.

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

Spain’s 10-year yield fell five basis points to 3.09 percent after reaching 3.08 percent, the lowest since September 2005. Similar-maturity Portuguese rates dropped five basis points to 3.87 percent, while Irish 10-year yields declined as much as six basis points to a record 2.853 percent.

Italian government securities returned 6 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s gained 6.5 percent and Germany’s earned 2.8 percent.

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