Italian bonds gain as investors plough back debt repayments

Mon Dec 16, 2013 12:32pm EST

By Marius Zaharia

LONDON Dec 16 (Reuters) - Italian bonds outperformed most of their euro zone peers on Monday as investors used money repaid by Rome to buy more of the country's paper in a market boosted by forecast-beating regional business surveys.

Purchasing Managers' Index data showed the euro zone's private sector ending the year on a high, rising to 52.7 in December, versus 51.6 the previous month and beating a 51.9 forecast in a Reuters poll.

The data, which gauges business activity across thousands of companies large and small, boosted assets perceived as riskier, such as equities and high-yielding euro zone bonds.

Italian 10-year yields fell 5 basis points to 4.05 percent, while equivalent Spanish yields fell 3 bps to 4.08 percent.

The Italian bonds' outperformance was caused by market players reinvesting some of the 20 billion euros of bonds repaid by Italy. Spain hopes to raise up to 2.5 billion euros in five- and 10-year bonds on Thursday.

"The outperformance in Italy is related to the debt redemptions ... (while) Spain has an auction this week," UniCredit rate strategist Luca Cazzulani said.

The tiny Slovenian bond market continued its rally following last week's banking stress tests, which revealed a capital shortfall of 4.8 billion euros for the country's banks - a figure which the government is confident it can raise without an international bailout.

Slovenian 10-year yields hit a new nine-month low of 5.12 percent on Monday. They have fallen more than half a percentage point since the stress tests results were published last week.

"It is a continuation of what we've seen recently in Slovenia thanks to the results of the stress tests which lowered the risk of a bailout programme," Commerzbank rate strategist David Schnautz said.

Arguing Ljubljana's funding needs for next year are manageable, Morgan Stanley strategists said in a note they remain "medium-term constructive" on Slovenian bonds.

Despite the improving risk appetite, German debt - perceived as a safe haven - held steady, with investors reluctant to make major shifts in positioning before a two-day U.S. Federal Reserve meeting starting on Tuesday

Even though the consensus expectation is still for the U.S. central bank to begin scaling back asset purchases in March, according to a Reuters poll of economists, a slew of upbeat U.S. data recently has increased speculation that tapering could come as soon as this week.

Bund futures closed flat at 140.25, while German 10-year yields stood at 1.84 percent.

FILED UNDER: