Italian Bonds Fall On Downgrade As German Yields Drop To Records

Bloomberg: Italian government bonds fell for a second day after Moody’s Investors Service cut the nation’s credit rating by two steps and reiterated its negative outlook.

Ten-year Italian yields climbed above 6 percent as the nation prepared to auction as much as 5.25 billion euros ($6.4 billion) of securities due between 2015 and 2023 today. German two- and five-year note yields fell to record lows as investors sought the safest assets. Italy is Europe’s largest bond market.

“The downgrade overnight pushed the selloff on the Italian bonds ahead of the auction,” saidNick Stamenkovic, a fixed- income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “It should intensify the pressure on overseas investors to move out of Italian bonds.”

The yield on 10-year Italian debt jumped 13 basis points, or 0.13 percentage point, to 6.04 percent at 9 a.m. London time. The 5.5 percent security maturing in September 2022 fell 0.94, or 9.44 euros per 1,000-euro face amount, to 96.575. The two- year yield climbed 10 basis points, to 3.91 percent.

Moody’s lowered Italy’s bond rating to Baa2 from A3 and said further cuts are possible because the nation’s economic outlook has “deteriorated,” it said in a statement released in Frankfurt. That’s two levels above junk and one higher than Spain, according to data compiled by Bloomberg.

‘Prices Sensitive’

The nation’s inflation-linked bonds may be excluded from some global bond indexes following the downgrade, forcing investors to sell, Christoph Rieger, the head of fixed-rate strategy at Commerzbank AG in Frankfurt, wrote in an e-mailed note today. The yield on Italy’s index-linked bond due in September 2021 rose 69 basis points to 5.51 percent.

Italy has 1.64 trillion euros of bonds outstanding, according to the website of the nation’s debt agency. The nation’s securities dropped yesterday as it sold one-year bills before today’s auction of longer-maturity debt.

“The cut is significant, it will clearly cheapen the paper up further this morning,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London, referring to the downgrade. “The investors who were likely to buy the paper at the auction before the downgrade will probably still do so albeit possibly in a more price sensitive manner.”

The German two-year yield fell one basis point to minus 0.042 percent and reached minus 0.05 percent, the lowest since Bloomberg began tracking the data in 1990. The five-year yield declined as much as two basis points to 0.285 percent, also an all-time low.

Yields on Austrian, Belgian, Dutch, Finnish and French securities all fell to records yesterday. The average yield of European government bonds due in three to five years dropped to an all-time low of 1.95 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts.

Germany’s debt has returned 4 percent this year, according to the EFFAS indexes. Italian securities have earned 8.4 percent, the indexes show.

reporters on this story: David Goodman in London