Spanish Yields Drop Below Italy as Berlusconi Debate Stems Rally

Bloomberg: Spain’s bonds rose, sending 10-year rates below those of Italy for the first time in 18 months, buoyed by Chinese economic data that exceeded analyst estimates and an easing of political tension related to Syria.

Spanish securities outperformed all but one of their euro-area counterparts, narrowing the additional yield investors demand to hold them instead of benchmark German bunds toward the least in more than two years. Italian bonds failed to match the gains in Spanish debt amid speculation a postponed vote on whether to expel former premier Silvio Berlusconi from the nation’s Senate will destabilize the government. Germany sold 910 million euros ($1.21 billion) of inflation-linked debt.

“The move has been driven by rising uncertainty with respect to the political situation in Italy,” Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA (UCG) in Milan, said of the yield spread between the two nations’ bonds. “In the past we have seen Italian yields above Spanish in periods of tension. From a macro perspective there are no big changes between Spain and Italy. Both have seen improving data.”

Spanish 10-year yields fell six basis points, or 0.06 percentage point, to 4.48 percent at 10:42 a.m. London time. The 4.4 percent bond due in October 2023 rose 0.48, or 4.80 euros per 1,000-euro face amount, to 99.35.

Yields on similar-maturity Italian debt declined two basis points to 4.50 percent. The last time Spain’s yields were below Italy’s was March 6, 2012.

Key Vote

Italian 10-year yields have climbed 10 basis points since Berlusconi said on Aug. 30 that his People of Liberty Party may withdraw its support for the government if he is ousted. A key vote in an Italian Senate panel on his expulsion may take place today, according to its head, Dario Stefano. The full Senate will then have the final word on the matter.

Germany’s 10-year yield rose five basis points to 2.01 percent, after climbing to 2.05 percent on Sept. 6, the highest level since March 2012. The Spain-Germany yield spread narrowed 11 basis points to 247 basis points. It reached 244 basis points on Aug. 19.

Chinese factory production rose 10.4 percent in August from a year earlier, the National Bureau of Statistics said in Beijing, compared with a median forecast of 9.9 percent in a Bloomberg News survey of economists. Retail sales advanced 13.4 percent, also topping estimates.

President Barack Obama said he would put a U.S. strike on Syria on hold if the nation followed through on a proposal to surrender its chemical weapons.

‘Big Worry’

“A Chinese slowdown is a big worry for the market so today’s industrial production data is putting some bearish pressure on core government bonds,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “Lessening of the risks for Syria is reducing the flight to quality. We also have quite a lot of supply this week, which is leading to higher yields.”

Europe’s largest economy sold the 10-year index-linked bonds at a real yield of 0.36 percent, up from 0.06 percent when it last sold the debt on June 11. The 10-year Germany break-even rate, a gauge of expectations for inflation over the next decade, was little changed today at 1.63 percentage points. The nation will also offer 5 billion euros of 10-year bunds tomorrow.

The Netherlands sold 2 billion euros of 10-year bonds at an average yield of 2.412 percent, up from 2.061 percent at the previous auction on July 9.

Dutch 10-year bond yields rose four basis points today to 2.43 percent. The French 10-year yield also gained four basis points, to 2.61 percent. Similar-maturity Greek yields fell nine basis points to 10.41 percent.

Belgium is selling 30-year bonds via banks today.

German bonds lost 2.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. Dutch securities dropped 3.3 percent, while Italy’s returned 3 percent.

 reporter on this story: Lucy Meakin in London