Italian Bonds Fall as EU Elections Test Investor Demand

Italian government bonds fell for a second week, pushing 10-year yields up from near a record low, amid speculation results of European Parliament elections may derail the euro region’s recovery.

Spain’s 10-year securities also dropped for a second week, even after Standard & Poor’s raised the nation’s credit rating one level to BBB. Yields close to record lows at Spain’s auction of five- and 10-year debt this week damped investor demand. Protest parties are forecast to surge in Greece, France, Italy, the Netherlands and elsewhere in the elections which run through May 25. European Central Bank officials are scheduled to meet on June 5 to set monetary policy.

“The European elections have been some kind of reason, or a trigger” for investors looking for an opportunity to reduce holdings in peripheral bonds, said Christian Lenk, a fixed-income analyst at DZ Bank AG in Frankfurt. “All in all we don’t think the elections are going to be a game-changer. After a few days the market will once again focus on the ECB meeting.”

Italy’s 10-year yield climbed nine basis points, or 0.09 percentage point, this week, to 3.16 percent at 5 p.m. London time yesterday. The rate dropped to a record-low 2.885 percent on May 15. The 4.5 percent bond maturing in March 2024 fell 0.825, or 8.25 euros per 1,000-euro ($1,363) face amount, to 111.44.

PollWatch 2014, a non-partisan forecasting group, said support for Europe’s mainstream parties will decline to 65 percent from 72 percent, according to final pre-election projections published on May 20. “If the protest vote turns out to be very strong, this will add to uncertainty,” Italy’s Finance Minister Pier Carlo Padoan said in an interview in Kigali, Rwanda, on May 22.

Yields Slide

Italian and Spanish bonds gave up some of their annual gains since 10-year yields slid to record lows earlier this month. The average yield to maturity on bonds from Greece, Ireland, Italy, Portugal and Spain climbed to 2.36 percent on May 22. The rate fell to 2.13 percent on May 8, the least since the formation of the currency bloc in 1999, according to Bank of America Merrill Lynch indexes.

Spain’s 10-year yield rose three basis points in the week to 2.99 percent. The rate dropped to 2.38 percent on May 15, the lowest since Bloomberg began collecting the data in 1993. The rate on similar-maturity German bunds climbed eight basis points from May 16, the most since the period ended March 21, to close at 1.41 percent.

Spain’s five-year yield advanced the most this week since Jan. 24. The rate jumped eight basis points to 1.67 percent.

The Madrid-based Treasury allotted notes due in April 2019 at an average yield of 1.648 percent on May 22, the lowest since Bloomberg began tracking the data in 2005. Investors bid for 1.91 times the amount of debt sold, down from a bid-to-cover ratio of 2.31 at a previous sale on April 24. Demand for 10-year bonds also auctioned on May 22 fell to the weakest since February 2013.

Italy is scheduled to offer as much as 4 billion euros of zero-coupon and inflation-linked debt on May 27, while Germany plans to sell 2 billion euros of 30-year bonds a day later.

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