Italian Yields Reach 7%, French Debt Slides

By Paul Dobson - Nov 15, 2011 9:13 PM GMT+0700

Italian bonds led a slump in euro- area government debt as investors abandoned all but the safest assets amid rising borrowing costs at auctions and concern the region’s financial woes are deteriorating.

“It’s a confidence crisis,” said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht, Netherlands. “Investors have no confidence that the euro zone can solve its problems. They will look for the most safe place they can store their money, which is Germany. Everything else is suffering.”

The rate on German two-year notes dropped below 0.3 percent for the first time, while the extra yield investors demand to hold 10-year bonds from France, Belgium, Spain and Austria instead of benchmark bunds all increased to euro-era records. Italy’s 10-year yield climbed above 7 percent as prime minister- in-waiting Mario Monti faced resistance on forming a cabinet for his new government. Spain and Belgium sold less than the maximum target of bills at auctions today as financing costs increased.

Italy’s 10-year yield climbed 22 basis points, or 0.22 percentage point, to 6.92 percent at 1:58 p.m. in London after reaching 7.07 percent. It rose to a euro-era record 7.48 percent on Nov. 9. The 4.75 percent bond due September 2021 slid 1.43, or 14.30 euros per 1,000-euro face amount ($1,354), to 85.425.

The extra yield investors demand to hold 10-year French debt instead of benchmark German bunds widened 27 basis points, the most since the euro started in 1999, based on closing-market rates, to 191 basis points, also the most since the common currency was introduced. The yield on the 10-year bund fell one basis point to 1.78 percent.

Stocks Slide

The Stoxx Europe 600 Index of equities fell 0.7 percent and the euro weakened 0.7 percent to $1.3535. Italian, Spanish, Belgian and French credit-default swaps surged to records.

Banks and investors are reducing holdings of European government bonds amid concern the region’s leaders aren’t doing enough to stem the spread of the two-year-old debt crisis. Kokusai Asset Management Co.’s Global Sovereign Open, Japan’s biggest mutual fund, sold its entire holdings of Italian government bonds by Nov. 10, a weekly report from the fund shows. BNP Paribas SA and Commerzbank AG said in earnings reports this month they’re unloading sovereign bonds at a loss.

Italian bonds slid today even as the European Central Bank was said by two people with knowledge of the transactions to have bought the securities. A spokesman for the central bank in Frankfurt declined to comment.

‘Cut Rates Now’

The ECB needs to “cut rates, now, and do something serious about helping governments, or the euro project is over,” Soeren Moerch, head of government-bond trading at Danske Bank A/S in Copenhagen, wrote in a note to clients today.

The central bank lowered its key interest rate a quarter point to 1.25 percent on Nov. 3. It raised borrowing costs by the same amount twice this year from a record-low 1 percent.

Two-year yields in Italy, Europe’s biggest bond market, surged 49 basis points to 6.49 percent as Monti struggles to form a Cabinet and amid concern he will be unable to tame the sovereign-debt crisis. President Giorgio Napolitano offered him the post on Nov. 13, a day after Silvio Berlusconi resigned. He holds a final day of talks today.

Dutch Prime Minister Mark Rutte called for the possibility of euro members to be expelled from the currency group, a day after German Chancellor Angela Merkel’s Christian Democratic Union party voted to allow euro states to quit the bloc. “We would like countries to be able to be pushed out of the euro zone,” Rutte said at a news conference in London, adding that this would be a last resort.

‘There’s Fear’

“At this stage there’s fear,” said Achilleas Georgolopoulos, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “You have the same disbelief about Italian politics and that’s apparent in Italian spreads widening today. Spain is following.”

Ten-year Spanish yields climbed 19 basis points to 6.29 percent. The extra yield, or spread, over similar-maturity German bunds surged to a euro-era record 458 basis points from 171 basis points on April 12.

Spain sold 3.16 billion euros of 12- and 18-month bills today, less than its maximum target of 3.5 billion euros, the central bank said. The average yield on the 12-month securities climbed to 5.022 percent from 3.608 percent at the previous sale on Oct. 18.

Spain is also planning to auction a maximum 4 billion euros of bonds due in 2022 in two days, the same day France sells as much as 7 billion euros of notes due in two-to-five years and as much as 1.2 billion euros of inflation-linked debt.

Belgian Sale

Belgium auctioned 2.73 billion euros of bills, less than the 3.2 billion euros it planned to raise, and paid the highest yield in three years on one-year securities.

The Belgian-German 10-year yield spread surged 34 basis points to 315 basis points after reaching 318 basis points, the most since the euro was introduced. The extra yield investors demand to hold 10-year Austrian bonds rose to an all-time high 192 basis points.

Derivative traders are wagering that U.S. and European banks’ willingness to lend will ebb as financial institutions shore up their balance sheets.

The spread between the dollar London interbank offered rate and the overnight index swap rate projected by contracts trading in the forward market rose to 62.25 basis points, the widest since May 2010, according to UBS AG data. The FRA/OIS spread for the March to June 2012 period projects a widening of more than 24 basis points from the current spot dollar Libor-OIS spread, an indirect measure of the availability of funds in the money market and of banks’ willingness to lend.

Default Swaps

Credit-default swaps on Italy jumped 41 basis points to an all-time high of 603 and Spain climbed 28 to a record 485, according to CMA prices. France rose 16 basis points to a record 230 and Belgium increased 25 basis points to a record 348. An increase signals worsening perceptions of credit quality.

Swaps on Finland rose six basis points to 73, the Netherlands increased 12 to 117 basis points, and Austria was up 27 at 229 basis points, according to CMA.

German bonds gained, pushing the two-year note yield as low as 0.295 percent, the least on record. A report from the ZEW Center for European Economic Research showed German investor confidence fell to a three-year low in November. The Federal Statistics Office said economic growth accelerated last quarter.

Greece sold 1.3 billion euros of 91-day bills at 4.63 percent, up from 4.61 percent at the previous offering.

Italian bonds have lost 8.4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Bunds have returned 9.1 percent and Spanish securities have made 0.2 percent, the indexes show.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

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