German bunds drop as Greece approves austerity plans, Italian bonds rise

German bunds dropped, underperfoming most of 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 securities rose as Greece’s vote curbed the risk of contagion to the region’s most-indebted nations. Euro- area finance ministers are due to convene in Brussels on Feb. 15 for an extraordinary meeting to decide on a second Greek aid package. France, Italy and Germany plan to sell bills Monday.

“The Greek parliament has now approved the measures so that takes away a bit of the uncertainty surrounding Greece and that is having an impact on bund yields,” said Elwin de Groot, a market economist at Rabobank Nederland in Utrecht, the Netherlands. “I would expect the market to maintain a bit of a wait-and-see stance because we’ve seen so many delays and uncertainties over the past weeks.”

The German 10-year bund yield rose six basis points, or 0.06 percentage point, to 1.96 percent at 9:23 a.m. London time. The 2 percent bond due in January 2022 fell 0.505, or 5.05 euros per 1,000-euro ($1,327) face amount, to 100.32.

Italian 10-year rates slid nine basis points to 5.52 percent, reducing the additional yield investors demand to hold the securities instead of benchmark German debt by 14 basis points to 3.56 percentage points.

The euro strengthened 0.5 percent to $1.3264 and the Stoxx Europe 600 Index of equities climbed 0.6 percent amid renewed confidence in Greece’s ability to avoid an economic collapse. European finance ministers ended a meeting last week with Luxembourg’s Jean-Claude Juncker saying Greece must turn budget cuts into law, flesh out 325 million euros in reductions and have major party leaders sign up to the program so they don’t retreat after elections.

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

Portuguese 10-year bond yields fell 24 basis points to 12.24 percent, after reaching 12.16 percent the lowest since Nov. 25. Similar-maturity Spanish bonds also rose, pushing the yield down five basis points to 5.25 percent.

German two-year notes slipped as the nation prepared to auction 4 billion euros of bills maturing in August. Six-month securities were sold with a yield of minus 0.012 percent when they were last offered on Jan. 9.

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

Italy plans to sell as much as 12 billion euros of 127- and 365-day bills Monday, while France will offer 8.7 billion euros of 84-, 175- and 357-day debt.

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. [Bloomberg]

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