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updated: 3/11/2013 6:55 AM

Italy's bonds decline after Ftch downgrade; German bunds gain c.2013 Bloomberg News

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Bloomberg News

Italy's government bonds fell for a second day after Fitch Ratings cut the nation's credit rating, saying inconclusive elections threatened the country's ability to respond to recession.

The declines pushed the two-year yield to the most in almost two weeks as Fitch said after markets closed on March 8 that it lowered Italy's sovereign rating to BBB+ from A- with a negative outlook. German 10-year bunds rose for the first time in six days as investors sought safer assets. Spanish bonds climbed for a ninth day as the country's economy minister predicted that economic growth would resume before year-end.

"The move looks to be related to the move by Fitch," said Luca Cazzulani, a senior fixed-income strategist at UniCredit Global Research in Milan. "We should be prepared for a very long period of uncertainty and volatility on the Italian yield curve. It is difficult to see the market taking a clear direction."

Italy's 10-year yields rose five basis points, or 0.05 percentage point, to 4.65 percent at 10:51 a.m. London time. The 5.5 percent bond due in November 2022 fell 0.425, or 4.25 euros per 1,000-euro ($1,300) face amount, to 106.93.

Two-year note yields climbed eight basis points to 1.84 percent after rising by 12 basis points, the most since Feb. 26.

"The increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy," Fitch said in its March 8 statement. "The ongoing recession in Italy is one of the deepest in Europe."

Trailing Spain

Italy's bonds have trailed behind their Spanish counterparts since the nation's elections last month failed to produce a clear winner, threatening outgoing Prime Minister Mario Monti's reforms that helped calm Europe's debt crisis.

The extra yield, or spread, that investors get for holding Spanish 10-year bonds instead of their Italian counterparts narrowed nine basis points today to seven basis points, the least since March 6, 2012, based on closing generic prices compiled by Bloomberg. The spread has narrowed from 116 basis points in July.

"Investors are starting to realize that further rating downgrades can follow," said Alessandro Giansanti, a senior fixed-income strategist at ING Groep NV in Amsterdam. "The latest political news points to a deadlock in the discussions to form a new government. Spain has a majority government and it has regained investors' confidence after the reduced budget deficit in 2012."

Growth Forecast

Spain's economy will return to growth before the end of the year, Economy Minister Luis de Guindos said in interview with Spanish broadcaster Antena 3. Italy's economy shrank 2.8 percent in the fourth quarter compared with the same period a year earlier, the Italian statistics institute in Rome said today.

Investors are paying less attention to the views of ratings companies and relying more on their own analysis. Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December.

German bunds rose even as a report showed exports rose more than economists predicted in January, adding to signs that Europe's largest economy is gathering momentum.

German Exports

Exports advanced 1.4 percent from December, when they gained 0.2 percent, the Federal Statistics Office in Wiesbaden said today. Economists had forecast a 0.5 increase, according to the median of 13 estimates in a Bloomberg News survey. Imports rose 3.3 percent from December.

The 10-year yield dropped three basis points to 1.50 percent after rising to 1.54 percent on March 8, the highest level since Feb. 25.

Italy's government bonds have returned 0.6 percent this month through March 8, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities rose 1.6 percent, while German bunds lost 0.4 percent.

Volatility on Austrian bonds was the highest in euro-area markets, followed by those of Germany and France, according to measures of 10-year debt, the yield spread between two- and 10- year securities, and credit-default swaps.

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