Italian Bonds Rally With Spain’s on European Polls, ECB Stimulus

Italy’s government bonds rose for a second day as Prime Minister Matteo Renzi’s party defeated a populist challenge in the European Parliament elections, boosting demand for the euro area’s higher-yielding assets.

Spanish bonds advanced on speculation the European Central Bank will increase economic stimulus and as European stocks climbed. Greek, Irish and Portuguese bonds also gained even as parties opposed to closer European Union surged in the polls. German bunds were little changed as a gauge of consumer confidence held at the highest since 2007. ECB President Mario Draghi said in Portugal today that policy makers need to be “particularly watchful” of low inflation.

“There’s a continuation of the move from Friday, so further recovery in peripheral markets,” said Rainer Guntermann, a fixed-income strategist at Commerzbank AG in Frankfurt. “The European Parliament elections have produced some eye-catching headlines but no overly shocking news. The market is in the grip of next week’s ECB meeting so this is likely to be the dominant driver for the coming days.”

Italy’s 10-year yield dropped 17 basis points, or 0.17 percentage point, to 2.99 percent at 4:45 p.m. London time after reaching 2.98 percent, the lowest level since May 15. The 4.5 percent bond maturing in March 2024 rose 1.465, or 14.65 euros per 1,000-euro ($1,365) face amount, to 112.905. Today’s was the biggest drop since June 7.

Stocks Rise

Spain’s 10-year rate fell nine basis points to 2.90 percent after sliding to 2.89 percent, also the lowest since May 15.

The Stoxx Europe 600 Index of shares rose 0.6 percent for a fourth day of gains after the MSCI Asia Pacific Index advanced 0.4 percent.

Renzi’s Democratic Party won 41 percent of the vote, followed by Five Star’s 21.1 percent, according to projections cited by RaiNews24 television. The tally sets Renzi up for a victory in his first national vote, reinforcing his position in power. His status as a newcomer to Rome has allowed him to mostly escape blame for the economic stagnation that has plagued Italy for 13 years.

Anti-establishment parties won 30 percent of the Europe-wide vote, up from 20 percent in the current parliament, according to official European Union projections late yesterday. Linked mainly by opposition to European unity, the motley collection of protest movements shows no signs of agreeing on a policy program.

Positive Results

“The election results are a positive, especially for Italy and Greece, where euroskepticism would have been a powerful threat to pending reforms and to the return of international investors,” Alberto Gallo, head of macro-credit research at Royal Bank of Scotland Group Plc in London said in an e-mailed note.

The yield on Greek 10-year bonds fell 25 basis points to 6.25 percent and that on similar-maturity Portuguese debt dropped six basis points to 3.70 percent.

Draghi said the election showed voters were looking for answers to the “thorny questions” of economic growth and employment. ECB officials are scheduled to meet on June 5 to set monetary policy after Draghi said earlier this month that the Governing Council was “comfortable” taking measures to boost inflation in the euro-area.

‘Negative Spiral’

“What we need to be particularly watchful for at the moment is, in my view, the potential for a negative spiral to take hold between low inflation, falling inflation expectations and credit, in particular in stressed countries,” Draghi said in a speech at the ECB Forum in Sintra, Portugal. “We are not resigned to allowing inflation to remain too low for too long.”

Euro-area inflation has been less than half the ECB’s goal of just under 2 percent since October.

German 10-year bonds were little changed at 1.42 percent after GfK AG said in a report its index of consumer confidence was at 8.5 in June, unchanged from the previous month. Two-year rates fell one basis point to 0.056 percent after reaching 0.051 percent, the lowest since Nov. 7.

The extra yield investors get for holding Spain’s 10-year bonds instead of similar-maturity German debt narrowed nine basis points to 1.48 percentage points.

Rabobank International recommends investors buy Spanish 10-year bonds versus Germany’s at current spread levels with a target of 1 percentage point and an order to exit the trade if the yield difference widens to 1.75 percentage points, analysts including the London-based head of rates strategy Richard McGuire, wrote in a client note today.

The Netherlands plans to sell as much as 2.5 billion euros of debt maturing in January 2019 tomorrow, while Italy is scheduled to auction up to 3 billion euros of zero-coupon securities due in April 2016 as well as 1 billion euros of inflation-linked bonds maturing in September 2018.

Italy’s government securities returned 6.2 percent this year through May 23, according to Bloomberg World Bond Indexes. Spain’s gained 7.4 percent and Germany’s earned 3.9 percent.

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