Italian and Spanish bonds jumped as borrowing costs slid at auctions and the European Central Bank kept its benchmark interest rate unchanged. German debt slipped.
The advance pushed Spanish two-year note yields to the lowest since March. The government sold 10 billion euros ($12.7 billion) of notes, twice the sales target, while Italy auctioned 12 billion euros of bills, easing concern the countries would struggle to finance their debts. The ECB held its main rate at 1 percent, an outcome predicted by economists in a Bloomberg survey. German 10-year bunds pared declines as reports showed U.S. retail sales and jobless claims missed estimates.
"The carry trade, with banks borrowing from the ECB and then investing in short-term government notes, will continue to be supportive for Spanish and Italian" debt, said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam.
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Italian two-year yields tumbled 50 basis points, or 0.50 percentage point, to 4.22 percent at 2:28 p.m. London time, after sliding to the least since Sept. 9. The 2.25 percent security due November 2013 climbed 0.810, or 8.10 euros per 1,000-euro face amount, to 96.72.
The yield on Italian 10-year securities dropped 38 basis points to 6.60 percent. Bunds underperformed the equivalent maturities of most euro-region nations including Spain, Belgium, Austria and France. Italian bonds narrowed the yield gap over German securities by 40 basis points to 477 basis points. The French-German yield spread narrowed 14 basis points to 120 basis points, and the Belgian yield difference dropped 25 basis points to 223 basis points.
Italy's Rome-based Treasury sold 8.5 billion euros of one- year debt at a rate of 2.735 percent, the lowest since June and less than half the 5.952 percent yield at the last sale on Dec. 12. The nation also auctioned 3.5 billion euros of 136-day bills at 1.644 percent. The government plans to sell debt maturing in 2014 and 2018 tomorrow.
Volatility on Italian sovereign debt was the highest in euro-area markets today, followed by Portuguese securities, according to measures of 10-year bonds, two- and 10-year spreads and credit-default swaps.
Spanish two-year note yields declined 19 basis points to 2.91 percent after the country sold 9.98 billion euros, twice the objective, of debt due in 2015 and 2016.
"The auction was very strong, a good start to the year for Spain," said Annalisa Piazza, a fixed-income analyst at Newedge Group in London. "People are starting to believe that something can be sorted out with the debt crisis. For the moment at least they are trying to make some money out of it."
Germany's two-year note yield rose two basis points to 0.16 percent after earlier dropping to match its record low of 0.134 percent. The rate on benchmark 10-year bunds advanced two basis points to 1.83 percent, after climbing as high as 1.85 percent.
ECB President Mario Draghi said today there are signs of stabilization in the economy, even as he said there remain "substantial downside risks" to the euro region's growth outlook, repeating a comment from the last meeting on Dec. 8. German government bonds advanced then after policy makers cut rates and offered banks unlimited cash for three years.
Bond Returns
German debt has handed investors a 0.1 percent return this year, after gaining 9.7 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds have lost 0.1 percent in 2012, and Spanish debt fell 0.9 percent, the indexes show.
French two-year note yields dropped to the lowest since May 2010 after David Riley, head of the sovereign-debt unit at Fitch Ratings, said France is "not a crisis country."
Data today showed France's inflation rate held at a three- year high in December. Consumer prices rose 2.7 percent from a year earlier, based on European Union methodology, matching the rate in November. Economists in a Bloomberg survey had forecast a 2.5 percent increase.
The French two-year yield dropped 16 basis points to 0.631 percent, after dropping to 0.614 percent. The 10-year yield fell 13 basis points to 3.03 percent.
Bloomberg News
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