Italian yields drop to 9-month low as Draghi signals improvement

ECB keeps rates steady

Source: Bloomberg Source: Bloomberg

March 8 (Bloomberg) -- Italy’s bonds rose, pushing 10-year yields to the lowest in nine months, as European Central Bank President Mario Draghi signaled the worst of the region’s debt crisis may be over.

German bunds dropped for the first time in three days after Draghi said “the risk environment has improved enormously,” reducing demand for the region’s safest securities. The extra yield investors get for owning Italy’s bonds instead of German bunds shrank to a six-month low on optimism Greece will attract enough investors to make its planned debt swap program a success. Draghi spoke after the ECB left its benchmark interest rate at 1%.

“Italian yields are very down on the day,” said John Davies, a fixed-income strategist at WestLB AG in London. “Draghi was bullish about the effect that the recent policies have had, he sounded as if he was happy with where things stand. Draghi remained cautious about the growth prospects and that kept bunds supported.”

Italy’s 10-year yield slid 13 basis points, or 0.13%age point, to 4.81% at 4:20 p.m. London time, after dropping to 4.75%, the lowest since June 8. The 5% security maturing in March 2022 climbed 1, or 10 euros per 1,000-euro ($1,325) face amount, to 101.94.

The difference in yield between Italian and German 10-year bonds shrank 16 basis points to 3.01%age points after narrowing to 2.93%, the least since Sept. 1.

The euro strengthened to a two-week high against the dollar and the yen, appreciating 0.9% to $1.3266 and 1.4% to 108.11 yen.

‘Low Levels’

ECB policy makers see “signs of stabilization in economic activity, albeit still at low levels,” Draghi said, adding that inflation will probably breach the central bank’s 2% limit this year. The ECB’s latest economic projections show inflation averaging 2.4% in 2012, he said. That’s up from a December forecast of 2%.

The German 10-year bund yield three basis points to 1.8%, and the two-year yield increased one basis point to 0.16%.

Greece moved closer to sealing the biggest sovereign restructuring in history as holders of about 60% of the eligible bonds said they will take part in the nation’s planned debt swap. Those agreeing include Greece’s largest banks, most of the country’s pension funds and more than 30 European banks and insurers including BNP Paribas SA and Commerzbank AG.

Greek two-year yields fell 13 basis points to 246.57%, pushing up the price to 17.5% of face value. The Greek note maturing on March 20 dropped 12.03 to 16.75% of face value, a record low based on closing prices.

Factory Orders

Demand for bunds also declined after a German report showed industrial output grew more than economists predicted, sapping investor appetite for haven assets. Output rose 1.6% in January from the previous month, the central bank said, surpassing the forecast of 1.1% in a Bloomberg survey.

German bonds have returned 0.4% this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian debt gained 13%, and Spanish securities rose 2.6%.

Spain’s 10-year bond yield was little changed at 5.07% today, while two-year yields declined six basis points to 2.29%.

Bonds from Italy and Spain have rallied since the ECB offered unlimited three-year cash to the region’s financial institutions in so-called longer-term refinancing operations in December and February. The securities advanced amid speculation banks are buying them to take advantage of higher yields after borrowing from the central bank at its 1% benchmark rate.

‘Furher ~Support’

“We expect that the three-year longer-term refinancing operations will provide further support for the ongoing stabilization in financial markets and, in particular, for lending activity in the euro area,” Draghi said today.

European inflation expectations rose, pushing the German two-year break-even rate to the highest since January, as the ECB raised its price-growth forecasts.

Short-term breakeven rates also jumped in France and Italy. The yield difference between two-year German nominal bonds and index-linked securities of the same maturity, a gauge of inflation expectations, advanced to 1.08%age points today, the most since Jan. 30.

Volatility in Greek government debt was the highest in euro-area markets today, followed by Italian securities, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Bloomberg News

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