Italy’s Bonds Decline With Spain’s as Economic Recovery Falters

Italy’s 10-year government bonds fell for a second day as signs that the euro-area’s economic recovery is losing momentum damped demand for the region’s higher-yielding assets.

The Italian securities slumped to their first back-to-back drop in almost four weeks as a report showed the nation unexpectedly slipped into a recession. The yield on German 10-year bunds fell to a record after a report showed factory orders in Europe’s largest economy dropped the most in over 2 1/2 years, adding to evidence that tension with Russia over Ukraine is leaving its mark. Greek bonds had their longest stretch of declines since January.

“Few people expected Italy to return to recession and that’s a reason for Italian bonds to weaken,” said Felix Herrmann, a research analyst at DZ Bank AG in Frankfurt. “German factory orders are often volatile but nonetheless the euro area is losing momentum and even Germany is not immune. Potential for further spread tightening is limited.”

Italy’s 10-year yield rose six basis points, or 0.06 percentage point, to 2.81 percent at 4:27 p.m. London time, after climbing five basis points yesterday. The 3.75 percent bond maturing in September 2024 fell 0.560, or 5.60 euros per 1,000-euro ($1,335) face amount, to 108.37. Spain’s 10-year yield increased four basis points to 2.59 percent.

Economic Reports

German orders, adjusted for seasonal swings and inflation, slid 3.2 percent in June from May, when they fell a revised 1.6 percent, the Economy Ministry in Berlin said today. Analysts forecast an increase of 0.9 percent, according to the median estimates in a Bloomberg News survey. The decline was the steepest since September 2011.

Italy’s gross domestic product contracted 0.2 percent in the second quarter, after a decline of 0.1 percent in the first three months of the year, Rome-based national statistics office Istat said today. The median prediction of economists in a Bloomberg survey was for a 0.1 percent expansion.

“Fairly weak German orders data puts a dampener on growth prospects for the quarter,” said Rainer Guntermann, a fixed-income strategist at Commerzbank AG in Frankfurt. “With a weakening Germany it will be difficult for the other euro-area nations. A recovery in Europe needs a recovery in Germany.”

Rally Ending

Bonds of Europe’s highly-indebted euro-area nations are paring gains that pushed yields to record lows amid signs the region’s economic growth is dimming. Goldman Sachs Group Inc. yesterday joined investors saying the narrowing of yield spreads to German bunds is over.

Benchmark 10-year bund yields slid seven basis points to 1.10 percent after declining to 1.095 percent, the lowest level since Bloomberg began compiling the data in 1989.

Today’s economic reports come as ECB officials gather in Frankfurt before announcing tomorrow their latest interest-rate decision. They’ll leave the benchmark rate unchanged at a record low of 0.15 percent, according to all 57 economists in a Bloomberg News survey. The ECB last added stimulus measures in June as officials sought to preserve the economic recovery and boost an inflation rate that has slipped to less than half the central bank’s target.

Weakness in Greek bonds may be a signal that investors are pricing in the possibility of talks between the government and its creditors over economic reforms and debt being more difficult, Barclays Plc analysts including London-based Henry Skeoch wrote in a client note today.

‘Difficult Talks’

Officials representing the European Union, the ECB and the International Monetary Fund, known as the troika, are due to return to Athens in September.

“We expect the next program review to be one of the most difficult to date,” the note said. “The troika will assess important reform milestones as well as debt sustainability with the view of delivering a much anticipated debt relief.”

Greek 10-year yields rose nine basis points to 6.53 percent after touching 6.64 percent, the highest level since May 21. The rate has increased for seven days, the longest run since the period through Jan. 27.

Italy’s bonds earned 9.9 percent this year through yesterday, Bloomberg World Bond Indexes show. Spain’s returned 10 percent, while Germany’s earned 5.5 percent.

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