Italy Leads Slide in Bonds of Europe's Lower-Rated Countries

  • Yield spread to German bonds widens first time in five days
  • ECB policy remains supportive of these bonds: RIA Capital

Italian and Portuguese bonds led declines in the debt of Europe’s lower-rated nations, underperforming their German counterparts for the first time in five days, as a slump in stocks highlighted reduced demand for higher-yielding assets.

Spanish securities also fell amid the political turmoil facing the country. The bonds of the euro zone’s so-called peripheral members had been rallying since the European Central Bank expanded its record stimulus program on March 10, returning 0.7 percent from then through Monday, compared with a 0.2 percent loss in German debt, Bank of America Merrill Lynch bond indexes show.

“There’s an element of risk-off that would likely have resulted in some profit-taking following the strong post-ECB performance of Spanish and Portuguese bonds,” said Orlando Green, a rates strategist at Credit Agricole SA’s corporate and investment-banking unit in London. “And for both countries, there are some domestic fundamental drawbacks, namely politics. That said, we see the decline today as a respite rather than a reversal of the previous days’ move.”

Italy’s 10-year bond yield climbed six basis points, or 0.06 percentage point, to 1.37 percent as of 4:49 p.m. in London. The 2 percent security due in December 2025 fell 0.595, or 5.95 euros per 1,000-euro ($1,109) face amount, to 105.755.

The extra yield that investors demand for holding Italian securities over similar-maturity German bunds widened for the first time in five days, to 1.05 percentage points.

Yield Spread

The 10-year Spanish bond yield climbed five basis points to 1.52 percent, after falling for the previous two days. Similar-maturity German bund yields rose four basis points to 0.32 percent.

Investors are concerned about a political impasse in Spain and fiscal challenges in Portugal. Spain is set for new elections on June 26 unless political parties can put together a governing majority by May 2. In Portugal, the European Commission has warned that the government may have to do more to meet its budget deficit targets.

“The recent improvement in risk appetite seems to be fading, putting some pressure on peripheral bonds,” said Nick Stamenkovic, a fixed-income strategy at RIA Capital Markets Ltd. in Edinburgh. “Political uncertainty continues to overhang Spain whilst investors remain jittery about Portugal’s fiscal policy. But overall, I still see the ECB’s latest aggressive action as a supportive factor.”

ECB’s Easing

The ECB last week cut all of its main interest rates and announced a 20 billion-euro monthly increase in its quantitative-easing plan that for the first time opened the door to purchases of corporate bonds. Policy makers also revealed a new four-year targeted-loan program. The Federal Reserve and Bank of England are due to meet on policy this week.

The extra yield investors demand for holding Spain’s 10-year bonds instead of the benchmark German securities rose to 120 basis points after falling to 118 basis points on Monday, the least since January on a closing basis.

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