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Italian and Spanish bonds follow Greek decline on EU election concern

Lukanyo Mnyanda & David Goodman

Italian government bonds fell, pushing 10-year yields to a one-month high, on concern elections for the European Parliament set for this week will increase political instability across the region.

Spain’s 10-year securities dropped for the second time in three days before the nation auctions bonds on May 22 as investors questioned the sustainability of a rally that pushed yields to record lows last week. With 90 percent of economists in a Bloomberg Monthly Survey predicting the European Central Bank will ease monetary policy in June, risks are increasing that investors will be disappointed should it fail to deliver.

“Investors might take a more prudent stance ahead of the elections,” said Felix Herrmann, a research analyst at DZ Bank AG in Frankfurt. “The market movement has revealed some profit taking after the massive rally we’ve seen. The rise in yields won’t last too long because everybody expects that the ECB will deliver some more unconventional measures.”

Italian 10-year yields jumped nine basis points, or 0.09 percentage point, to 3.15 percent at 1:08 p.m. London time. The rate climbed 11 basis points last week, the first increase since the period ended April 11, and reached 3.20 percent today, the highest since April 14. The 4.5 percent bond due in March 2024 fell 0.785, or 7.85 euros per 1,000-euro ($1,372) face amount, to 111.48.

Spanish 10-year yields rose five basis points today to 3.00 percent, after falling to a record 2.83 percent on May 15.

Greek Risk

Greece’s securities led a decline in higher-yielding government bonds across the euro area last week on concern political parties opposed to the nation’s financial bailout and austerity program were gaining support. Prime Minister Antonis Samaras’s coalition partner Pasok, which dominated Greek politics for three decades, was ranked sixth in an opinion poll with 5.5 percent.

A first round of local and regional elections ended yesterday with no single party wining enough support to declare a decisive victory.

Yields on Greece’s 2 percent bonds due February 2024 were little changed at 6.86 percent today, after jumping 75 basis points last week, the most since the period through June 21.

In Italy, Prime Minister Matteo Renzi’s party is facing its first elections since coming to power three months ago, risking a voter backlash amid a sluggish economy and a corruption scandal in Milan. The European elections are due May 22-25.

ECB Support

Led by the so-called periphery, euro-area government bonds rose in each of the first four months of this year, boosted by the potential for monetary stimulus from the ECB. Even after the selloff, Spain’s 10-year bonds yield 165 basis points more than similar-maturity German debt, compared with 222 basis points last year, and almost 650 basis points in July 2012.

“We’ve got a market which is positioned too much in one direction,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. Last week, “we had everyone going for the door at the same time. This created some volatility for the first time in quite a while. European elections this week are also a reason for some people to wait on the sidelines.”

Ireland’s 10-year bonds declined even after Moody’s Investors Service raised the country’s rating two levels to Baa1 from Baa3hcp, pushing the yield five basis points higher to 2.72 percent. The Irish rate fell to 2.611 percent on May 15, the least on record.

Rates on German 10-year bonds climbed two basis points to 1.35 percent today, having fallen to 1.30 percent on May 16, which was the least since May 17, 2013.

Volatility on Italian bonds was the highest in euro-area markets today, followed by those of Finland and Ireland, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.

Italy’s government bonds returned 6.8 percent this year through May 16, according to Bloomberg World Bond Indexes. Spain’s earned 7.7 percent, Greece’s 21 percent and Germany’s gained 4.1 percent.

[Bloomberg]

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