Italian Government Bonds Drop Before Debt Auctions; German Notes Advance

By Emma Charlton - Nov 29, 2011 4:54 PM GMT+0700

Italian bonds fell as the nation prepared to sell debt amid speculation it may again be forced to pay above the 7 percent threshold that prompted Greece, Portugal and Ireland to seek external aid.

Germany’s two-year notes rose before European finance ministers meet today to seek a resolution to the region’s debt crisis. Italy aims to sell as much as 3.5 billion euros ($4.7 billion) of three-year notes, 2.5 billion euros of 2022 debt and 2 billion euros in 2020 securities. The nation paid more than 7 percent at auctions yesterday and on Nov. 25. Belgium will sell bills today.

“The market is waiting to see how successful today’s auction will be,” said Ralf Umlauf, head of floor research at Helaba Landesbank Hessen-Thueringen in Frankfurt. “Normally before auctions the bonds come under pressure. Yesterday we saw good demand for Belgium’s bonds so there’s a good chance to see a normal outcome from the Italian and Belgian auctions today.”

Italy’s 10-year yield climbed 14 basis points, or 0.14 percentage point, to 7.37 percent at 9:50 a.m. London time. The 4.75 percent security due September 2021 fell 0.820, or 8.20 euros per 1,000-euro face amount, to 82.790. Two-year Italian rates rose 13 basis points to 7.23 percent.

Euro-Era Record

The 10-year Italian yield has climbed more than one percentage point this month and more than 2.5 percentage points this year amid concern that the nation’s debt load -- bigger than that of Greece, Spain, Ireland and Portugal combined -- is unsustainable.

Italy’s two-year yield reached a euro-era record of 8.12 percent yesterday as the nation sold 567 million euros of inflation-linked notes. The securities on offer this week are competing with sales of securities in Belgium, France and Spain.

The European Central Bank is said to have begun purchasing Italian and Spanish debt on Aug. 8 to contain a surge in yields. After falling to around 5 percent that week, rates on the bonds climbed above 6.5 percent this month amid speculation that the two nations won’t be able to repay their debts.

“Current Italian yield levels speak for themselves,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “A sustainable level for yields would be about 200 basis points lower than where we are now, so the market’s skepticism is more than justified.”

Stocks Drop

Spain’s 10-year bond yields were little changed at 6.57 percent, while the rate on similar-maturity Belgian debt was four basis points lower at 5.53 percent.

Germany’s 10-year yield was little changed at 2.30 percent. Two-year rates were two basis points lower at 0.43 percent.

The Stoxx Europe 600 Index declined as much as 0.8 percent and the euro was little changed at $1.3338.

Finance ministers from the 17-member monetary union are to meet in Brussels today to debate using their bailout fund, the European Financial Stability Facility, to insure sovereign debt with guarantees.

Agreeing on a sufficient response to Europe’s problems is of “huge importance” to the U.S., President Barack Obama said after yesterday meeting European Union President Herman Van Rompuy and European Commission President Jose Barroso.

Bunds dropped yesterday, pushing the yield to a more than three-month high, as speculation European leaders are moving closer to agreeing on measures to combat the euro area’s sovereign-debt crisis reduced demand for the regions’s safest investments.

German government bonds have returned 6.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds lost 11 percent, and Belgian debt dropped 5.6 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net