Italian Bonds Outperform Bunds on Bets of Further ECB Stimulus

The yield premium investors demand to hold Italian 10-year bonds over their German peers narrowed to the least in three years on bets the European Central Bank will take further action to combat low inflation.

German 10-year bunds declined for a third day as euro-area consumer confidence unexpectedly climbed this month to the highest level since October 2007. The chances of the ECB undertaking large-scale asset purchases this year have risen to more than 50 percent, according to Citigroup Inc. Dutch bonds fell as the Netherlands sold 2.48 billion euros ($3.42 billion) of three-year notes today, while Belgium auctioned debt maturing in 2019, 2024 and 2035.

“If the ECB eases it gives further support to the peripheries,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen, referring to Europe’s most-indebted nations. “Some of that may already be priced in but peripheries still have more to go as demand is high and fundamentals are improving. Risk appetite is improving after some correction and we’ve seen some upward pressure on bund yields.”

Italy’s 10-year yields fell three basis points, or 0.03 percentage point, to 3.09 percent at 4:12 p.m. London time after falling to 3.07 percent on April 17, the lowest since Bloomberg started collecting data in 1993. The 4.5 percent bond due in March 2024 rose 0.25, or 2.50 euros per 1,000-euro face amount, to 112.08.

Spread Narrows

Germany’s 10-year yield increased three basis points to 1.54 percent. The yield difference between Italian 10-year securities and benchmark German bunds narrowed six basis points to 1.55 percentage points, the least since May 2011.

Euro-area government bond markets were closed yesterday and on April 18 for public holidays.

A gauge of household confidence in the euro region rose to minus 8.7 in April from minus 9.3 a month earlier, the European Commission in Brussels said in a preliminary report. That beat the median forecast of minus 9.3 in a Bloomberg News survey of economists.

ECB President Mario Draghi said on April 3 that he has “unanimous” backing from policy makers for unconventional measures if needed after euro-area inflation dropped to 0.5 percent in March, the slowest rate in more than four years, compared with the central bank’s goal of just under 2 percent.

Purchasing managers’ indexes tomorrow are forecast to show manufacturing growth in April holding at the weakest pace this year.

‘Quantitative Easing’

“The ECB has opened the door to quantitative easing, with a unanimous commitment to using unconventional instruments if necessary to cope with low inflation for a prolonged period of time,” Citigroup strategists including senior European economist Guillaume Menuet wrote in a note to clients today. “We believe that the ECB will use standard and non-standard measures first in June to coincide with a fresh round of downward revisions to staff inflation forecasts. QE, if it happens, will likely come in September or December 2014.”

The Netherlands sold debt maturing in April 2017 at an average yield of 0.412, compared with 0.421 percent at a previous auction of three-year notes on March 11.

Belgium allotted 1.1 billion euros of 10-year debt at an average yield of 2.119 percent, down from 2.424 percent at a previous auction in February. The nation also sold 630 million euros of five-year notes and 745 million euros of bonds maturing in 2035.

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

France’s 10-year yield rose three basis points to 2.02 percent. The rate dropped to 1.94 percent on April 15, the lowest since May 24.

Spain and Italy are scheduled to sell bonds on April 24, while Portugal will auction 10-year debt tomorrow for the first time since the nation’s bailout in April 2011. The Lisbon-based government debt agency IGCP said on April 17 that it will sell as much as 750 million euros of the securities.

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