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Euro bonds ignore growth concern on ECB before Greece sells debt

Lucy Meakin & David Goodman

Europe’s worsening growth prospects are losing significance for bond investors as bets the European Central Bank will begin asset-purchase stimulus measures boost demand for the region’s higher-yielding bonds.

The Italian yield premium over German bunds declined for the first time in three days even after Prime Minister Matteo Renzi said on Tuesday gross domestic product will expand less this year than previously forecast. Speculation the ECB will unveil a program on quantitative easing will support demand for Greek debt as the nation prepares to announce a 2 billion-euro ($2.76 billion) sale of five-year notes on Wednesday, according to ING Groep NV. Germany sold 3.5 billion euros of two-year securities.

“It seems everything is bulletproof even when you do get relatively bad news; people are prepared to look straight through it,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “People are still hunting for yield and in the absence of any more material rise in safe-haven yields that means turning to bond markets that a more rational evaluation might lead you to be cautious about.”

Italian 10-year yields fell two basis points, or 0.02 percentage point, to 3.20 percent at 10:46 a.m. London time. The 4.5 percent security due March 2024 rose 0.195, or 1.95 euros per 1,000-euro face amount, to 111.19. The rate on equivalent- maturity German bunds rose two basis points to 1.57 percent.

The extra yield investors demand to hold Italy’s 10-year bonds over bunds narrowed to 161 basis points, about two basis points from the lowest since June 2011.

Greece will begin the sale of notes on Thursday, according to a person familiar with the arrangements, who asked not to be identified because the details aren’t public. The sale will be announced at 11 a.m. London time on Wednesday.

Greece’s return to debt markets is the latest milestone on the euro area’s path to recovery following a debt crisis that pushed borrowing costs to record highs. The average yield to maturity on bonds from Greece, Ireland, Italy, Portugal and Spain fell to 2.25 percent on April 4, the lowest in the history of the currency bloc, according to Bank of America Merrill Lynch indexes. It rose to 9.55 percent in 2011 and was at 2.27 percent on Wednesday.

“Greece benefits from the low-rate environment in the eurozone and from the QE talks, which are driving a substantial interest for high-yield issuers, no matter how down they are in the credit ladder,” said Alessandro Giansanti, a senior rates strategist at ING in Amsterdam. “This is a good opportunity for Greece to pre-fund the financing needs of coming years.”

The rate on German two-year notes was at 0.18 percent after today’s auction. Germany sold the two-year notes at an average yield of 0.17 percent, compared with 0.15 percent on March 12.

Greek bonds returned 30 percent this year through Tuesday, the best-performing sovereign debt market according to Bloomberg World Bond Indexes. Italian securities rose 5.8 percent, Spain’s gained 6.3 percent and Germany’s advanced 2.5 percent.

[Bloomberg]

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