Italian Bonds Drop First Time in Four Days as Rally Fades

Italian government bonds declined for the first time in four days as a rally propelled by European Central Bank stimulus that drove yields on the securities to a record low showed signs of losing momentum.

Italy’s 10-year yields rose the most in three weeks before the nation sells as much as 8.5 billion euros ($11.5 billion) of debt this week, including new seven-year notes. Rates on Spain’s 10-year bonds increased from an all-time low, while yields on their Portuguese peers climbed from the least since 2005. Greece’s five-year yield dropped below 4 percent for the first time since 2009.

“Spreads are getting tighter and tighter and it’s become a more dangerous game,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “The trend is for tighter spreads but the risk-reward is not as good as it has been.”

Italy’s 10-year yield climbed seven basis points, or 0.07 percentage point, to 2.78 percent at 4:14 p.m. London time. The 4.5 percent bond due in March 2024 fell 0.66, or 6.60 euros per 1,000-euro face amount, to 114.75. The rate dropped 32 basis points in the previous three days and declined to 2.694 percent yesterday, the lowest on record.

The rate on similar-maturity Spanish bonds rose four basis points to 2.62 percent after dropping to as low as 2.542 percent.

Bond Rally

Higher-yielding euro-area bonds have gained since June 5 when the ECB became the first major central bank to charge fees on deposits and unveiled other plans to support an economy threatened by deflation. Policy makers led by President Mario Draghi cut the deposit rate to minus 0.1 percent, lowered the main refinancing rate to a record 0.15 percent and announced measures including targeted longer-term refinancing operations.

Italy is scheduled to auction as much as 4 billion euros of notes maturing in December 2021 on Thursday as well as securities due in May 2017 and September 2044. The Rome-based Treasury last sold seven-year debt on May 13 at an average yield of 2.29 percent.

“There has been such a huge rally over the last few days and now yields seem to be rebounding,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “Taking into account we are heading into auctions, it may be a technical movement ahead of that.”

Bailout Exit

Portugal’s five-year rate dropped to as low as 1.994 percent, the least on record based on closing-price data, as Finance Minister Maria Luis Albuquerque reiterated the country doesn’t need a precautionary credit line after exiting its bailout program. The nation’s 10-year yield fell four basis points to 3.33 percent after declining to 3.23 percent, the lowest since September 2005.

Portugal plans to sell 10-year bonds at an auction tomorrow for the first time since exiting its bailout program last month, the government debt agency IGCP said on its website on June 6.

“Markets will assess whether we are willing and able to keep discipline, to keep track, to maintain the course that we have set,” Albuquerque said at conference in Brussels. “For that, we do not need a precautionary program. The Portuguese government knows what it must do and we are determined to do it.”

Greece’s five-year yield tumbled as much as 34 basis points to 3.83 percent, the lowest since December 2009.

Germany’s 10-year yield rose three basis points to 1.41 percent today, leaving the spread versus Italian bonds five basis points wider at 137 basis points. The difference shrank to 132 basis points yesterday, the tightest since April 2011.

The extra yield investors demand to hold Spanish 10-year bonds over bunds increased one basis point to 121 basis points after shrinking to 120 basis points yesterday, the narrowest since May 2010.

Italian government securities returned 9.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. Greece’s earned 32 percent, Spain’s 10 percent and Germany’s gained 4 percent.

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