Italian bonds drop as Greek concern sparks worst week in a year

Italian bonds fell, with 10-year yields set for the biggest weekly increase in more than a year, as prospects of Greece exiting its bailout combined with the threat of recession to sap demand for higher-yielding assets.

Spain’s government securities dropped for a third day before the country’s rating review by Moody’s Investors Service, a day after a debt sale fell short of its maximum target amid turmoil prompted by a surge in Greek yields. German 10-year bonds headed for a fifth week of gains as economic reports this week and gauges showing a decline in inflation expectations fueled concern the euro area is heading for recession.

“Over the last couple of days the situation in inflation and equity markets has spilled over into peripheral spreads again,” Peter Schaffrik, head of European rates strategy at RBC Capital Markets in London, wrote in a client note dated Thursday. “The proverbial straw that broke the camel’s back was most likely the Greek bond markets.”

Italy’s 10-year yield rose five basis points, or 0.05 percentage point, to 2.63 percent at 8:24 a.m. London time, pushing the increase this week to 31 basis points, the most since June 2013. The 3.75 percent bond due September 2024 declined 0.475, or 4.75 euros per 1,000-euro ($1,279) face amount, to 109.81.

The rate on Spanish 10-year bonds climbed six basis points to 2.27 percent, while that on equivalent Greek debt rose eight basis points to 9.04 percent, an increase of almost 2.5 percentage points in the week. [Bloomberg]

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