Strong demand for Italian bonds

ITALIAN BONDS advanced, with 10-year debt heading for a seventh week of gains, after the nation raised its maximum amount at an auction of zero-coupon notes.

Spanish bonds gained for the seventh day before the European Central Bank offers regional banks a second round of three-year loans next week as it seeks to contain the sovereign debt crisis.

“It was a very strong zero-coupon auction,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate and Investment Bank in London. The results are “indicative of continued demand for shorter-maturity Italian paper over the past couple of months.”

The Italian 10-year bond yield fell seven basis points, or 0.07 percentage point, to 5.48 per cent, extending this week’s decline to 10 basis points.

The 5 per cent bond due March 2022 rose 0.475, or €4.75 per €1,000 face amount, to 96.895. Two-year yields dropped 10 basis points to 2.82 per cent.

Italy sold €3 billion of two-year, zero-coupon notes at an average yield of 3.013 per cent, down from 3.763 per cent at the previous offering on January 26th. The nation also auctioned €1.5 billion of inflation-linked debt.

Spanish bonds headed for a second weekly gain before the ECB offers the second of its so-called longer-term refinancing operations on February 28th.

European financial institutions may ask for €470 billion of loans, compared to €489 billion in the previous offering in December, according to the median of 28 estimates in a Bloomberg survey.

“The long-term refinancing operation is the big event and overshadows the rest of the landscape, said David Schnautz, a fixed-income strategist at Commerzbank. “The overall market sentiment is still positive.”

The Spanish 10-year yield fell three basis points to 5.05 per cent, having dropped 21 basis points this week. The two-year notes declined 10 basis points to 2.6 percent.

German 10-year bund yields were within a basis point of the lowest in a week after a government report confirmed Europes biggest economy shrank last quarter. – (Bloomberg)