Italian bonds rise as Greek vote cuts contagion risk

German bunds fell, underperforming all their euro-area peers, after Greek lawmakers approved spending cuts demanded by European finance chiefs, reducing investor appetite for the safest assets.

Italian 10-year bonds advanced for the fifth time in six days and Portuguese yields reached an 11-week low as Greece’s vote curbed the risk of contagion to the region’s most-indebted nations. Euro-area finance ministers plan to convene on Feb. 15 to decide on a second Greek aid package. France is due to sell bills today after Germany and Italy auctioned short-term debt.

Bunds “are drawing back a bit,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “It is a better sentiment for peripherals on the back of the Greek parliamentary vote yesterday. This is still a very troublesome issue and at this point now I would still not say we are out of the woods yet.”

The German 10-year bund yield rose six basis points, or 0.06 percentage point, to 1.97 percent at 1:05 p.m. London time. The 2 percent bond due January 2022 fell 0.535 or 5.35 euros per 1,000-euro ($1,326) face amount, to 100.29.

Italian 10-year rates slid 13 basis points to 5.49 percent, reducing the additional yield investors demand to hold the securities instead of benchmark German debt by 18 basis points to 3.52 percentage points. Spanish 10-year yields fell nine basis points to 5.21 percent.

Euro, Stocks Climb

“We’re seeing a bit of a logical reaction to at least the slightly less risk, in the sense that the Greek parliament has now approved the measures,” said Elwin de Groot, a market economist at Rabobank Nederland in Utrecht, the Netherlands. “We’ve had quite a big rally in Italian and Spanish bonds so the question there is how much further can we see those spreads fall.”

The euro strengthened 0.4 percent to $1.3249 and the Stoxx Europe 600 Index of equities climbed 0.8 percent amid renewed confidence in Greece’s ability to avoid economic collapse. European finance ministers ended a meeting last week with Luxembourg’s Jean-Claude Juncker saying aid wouldn’t be forthcoming unless Greece turned budget cuts into law, fleshed out 325 million euros in reductions and had major party leaders sign up to the program so they don’t retreat after elections.

Greece ‘Saved’

Greece “will be saved in one way or another,” German Finance Minister Wolfgang Schaeuble told newspaper Welt am Sonntag yesterday.

Portuguese 10-year bond yields fell 31 basis points to 12.17 percent, after dropping to as low as 12.03 percent, the lowest since Nov. 24.

Volatility on Greek and Dutch debt was the highest in euro- area markets today, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Swedish debt was the most volatile of European securities. The nation is preparing to sell 1.5 billion euros of three-year bonds via banks, according to a banker with knowledge of the transaction. The move in the Swedish two- and 10-year spread was 1.9 times the 90-day average change.

German two-year notes slipped as the federal government sold 3.01 billion euros of six-month bills at an average yield of 0.0761 percent, up from minus 0.0122 percent at a sale on Jan. 9. The auction attracted bids for 1.51 times the securities allocated to investors, less than the so-called bid-to-cover ratio of 1.82 percent last month.

The German two-year note yield rose three basis points to 0.27 percent, after earlier reaching 0.28 percent, the highest since Dec. 15.

Italian Notes

Italian two-year notes advanced, pushing the yield down 14 basis points to 2.97 percent, as borrowing costs fell at an auction of 12 billion euros of bills. The Rome-based Treasury sold 8.5 billion euros of 365-day bills at an average yield of 2.23 percent, down from 2.735 percent at the last auction of similar-maturity securities on Jan. 12. Italy’s Treasury also sold 3.5 billion euros of 127-day bills.

France will offer 8.7 billion euros of 84-, 175- and 357- day debt later today.

German bunds have handed investors a loss of 0.5 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds have returned 8.4 percent and Spanish government debt made a profit of 1 percent.