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German Bunds Rise Before Draghi Hearing; Italian Bonds Decline

Posted by Joseph Trevisani on Feb 18, 2013 2:49:00 PM

Germany’s bonds rose, with 10-year yields falling toward the lowest in three weeks, as European Central Bank President Mario Draghi said euro-area data showed economic weakness at the start of this year.

Italian bonds declined on speculation an election this month will result in a hung parliament, setting back reform measures. Spanish securities fell before the government sells as much as 4 billion euros ($5.3 billion) of debt this week. German government securities outperformed all their regional peers, extending gains from last week when a report showed the euro- area economy shrank last quarter.

“Draghi’s comments are of the same dovish tenor as his recent statements,” said Ralf Umlauf, a research analyst at Landesbank Hessen-Thueringen in Frankfurt. “Markets are again pricing in the fantasy of an interest-rate cut and bunds have risen a little bit. We don’t think there will be a cut.”

Germany’s 10-year yield fell two basis points, or 0.02 percentage point, to 1.63 percent at 4:46 p.m. London time after dropping to 1.58 percent on Feb. 8, the lowest level since Jan. 25. The 1.5 percent bund due in February 2023 rose 0.215, or 2.15 euros per 1,000-euro face amount, to 98.82.

The overall situation in the euro-area remains fragile, even though the region has made “great progress” battling the sovereign-debt crisis, Draghi told lawmakers in the European Parliament in Brussels.

“Available indicators signal further weakness at the beginning of 2013, with domestic demand remaining dampened,” he said. “Even though we have yet to see sustained improvement in the real economy,” survey indicators have confirmed a stabilization at a low level, he said.

GDP Contracts

Euro-region GDP shrank 0.6 percent from the third quarter, the biggest decline since the first three months of 2009, the European Union’s statistics office said on Feb. 14. ECB policy makers next meet on March 7 after leaving their benchmark rate at a record low of 0.75 percent on Feb. 7.

Other so-called core bond markets also advanced. Austria’s 10-year yield dropped two basis points to 1.97 percent and France’s fell one basis point to 2.27 percent.

Volatility on Austrian bonds was the highest in euro-area markets, followed by those of the Netherlands and Germany, according to measures of 10-year debt, the spread between two- year and 10-year securities and credit-default swaps.

Italian Bonds

Italy’s 10-year yield rose the most in a week before the nation holds parliamentary elections on Feb. 24-25.

Front-runner Pier Luigi Bersani had 33.8 percent support in an SWG Institute survey published Feb. 8, the day before Italy’s two-week polling blackout began. That compares with 27.8 percent for former premier Silvio Berlusconi.

The nation’s 10-year yield climbed three basis points to 4.41 percent after rising as much as eight basis points, the most since Feb. 6. The rate has dropped more than 2.3 percentage points since Berlusconi offered his resignation on Nov. 8, 2011.

“Everybody is cautious in advance of the election so Italian yields could develop higher,” said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt. “All the periphery is heading in that direction.”

Spain’s 10-year yield increased four basis points to 5.24 percent. The Madrid-based treasury will sell securities due in 2015, 2019, and 2023 on Feb. 21.

Germany is scheduled to auction 5 billion euros of 10-year bunds on Feb. 20.

Sweden’s bonds fell after the Financial Supervisory Authority extended a temporary floor on the discount rate used by pension funds, damping demand for the securities.

Insurance and pension companies can keep applying a floor to their discount rate until the end of 2013, compared with an initial deadline of June, the FSA said.

The country’s 10-year yield climbed two basis points to 2.04 percent.

German bonds handed investors a loss of 1.6 percent this year through Feb. 15, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French securities lost 1.7 percent and Italy’s gained 1.3 percent, the indexes show.


Chart: Bloomberg


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