Spanish 10-year yields climbed eight basis points to 5.23 percent, and the rate on similar-maturity Portuguese securities increased four basis points to 13.40 percent.

Volatility on Portugal's debt was the highest among 24 nations tracked by Bloomberg, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Italian bonds have handed investors a loss of 5.8 percent in 2011, headed for the worst year since the European Federation of Financial Analysts Societies and Bloomberg started compiling indexes on the securities in 1992. They've slumped as concern policy makers aren't doing enough to tackle the debt crisis prompted banks and overseas funds to sell the nation's debt.

Longer-maturity bonds led losses today after the Treasury in Rome sold 7.02 billion euros of debt, less than its maximum target of 8.5 billion euros. It auctioned 2.5 billion euros of notes due in 2014, versus the maximum of 3 billion euros, and investors bid for 1.36 times the amount of securities sold, from 1.5 times last month. The yield fell to 5.62 percent, from 7.89 percent at the previous sale on Nov. 29.

“Bid-cover ratios were low, but with this being year-end that is to be expected,” Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London, wrote in a note to clients. “The disappointment will mainly be that the demand for the three-year failed to show any improvement above the norm,” even after the European Central Bank provided 489 billion euros of three-year loans to financial institutions last week, he said.

Euro Weakens

The euro fell as much as 0.6 percent to $1.2858, the weakest level since Sept. 14, 2010. The common currency dropped to 100.06 yen, the 10-year low.

“I don't think it went well at all,” Mark Grant, a managing director at Southwest Securities Inc. in Fort Lauderdale, Florida, said about the Italian auction. “The bid- to-cover ratio was quite worrying. It was certainly worrisome for future demand of longer-term securities.”

Italy expects to raise almost 450 billion euros from debt sales next year, enough to cover 202 billion euros of maturing bonds and finance a 23.6 billion-euro deficit, Maria Cannata, director of public debt, said in a Dec. 24 interview with newspaper Il Sole 24 Ore.

Shorter-maturity Italian notes climbed as Prime Minister Mario Monti said his government will focus on making Italy's debt sustainable and doesn't “rule out” more aggressive efforts to reduce the existing stock of debt.

Three-year notes gained for a second day, with yields falling two basis points to 5.85 percent.

German two-year yields matched yesterday's low of 0.142 percent, the least since Bloomberg began collecting the data in 1990. The 10-year bund yield fell four basis points to 1.86 percent after reaching 1.85 percent, the lowest since Nov. 18.

The German inflation rate, calculated using a harmonized European Union method, fell to 2.4 percent from 2.8 percent in November, the Federal Statistics Office said today. Slower inflation helps preserve the purchasing power of the fixed income from bonds.

Germany's government bonds have returned 9.4 percent this year, according to the Bloomberg/EFFAS indexes.

Bloomberg

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