Italy’s Bonds Lag Germany by Most in 2 Weeks as Referendum Looms

(Bloomberg) -- Italy’s 10-year government bonds trailed behind their German peers by the most in two weeks as the political turmoil surrounding Prime Minister Matteo Renzi weighs on the nation’s sovereign securities.

The yield premium that investors demand for holding Italian 10-year debt instead of benchmark German bunds has widened from a four-month low reached on Aug. 15. Already struggling with sluggish growth and a banking crisis, Italy is heading for a referendum as Renzi attempts to overhaul the constitution. He has pledged to step down if the vote goes against his proposed measures.

Portugal’s 10-year bonds rose for the first time in six days even as the nation’s sovereign rating comes under scrutiny. The yield fell from the highest level in four weeks.

“People have started to look a lot closer” at the referendum in Italy, said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. As the vote nears people will “start to process in the different eventualities.”

Italy’s 10-year bond yield rose three basis points, or 0.03 percentage point, to 1.13 percent as of 4:25 p.m. London time. The 1.6 percent security due in June 2026 fell 0.255, or 2.55 euros per 1,000-euro ($1,132) face amount, to 104.355.

The yield on similar-maturity German debt was little changed at minus 0.09 percent. That left the spread between the securities at 1.22 percentage points. It reached 1.24 percentage points earlier, the widest since Aug. 8.

The spread could see increased volatility and also widen further “on suggestions that Renzi is in trouble,” Cantor’s Callan said.

Portugal Rebounds

DBRS Ltd., the only major ratings company to rate Portuguese government debt investment grade, is scheduled to review its ranking on Oct. 21. Its BBB (low) grading makes the securities eligible for inclusion in the European Central Bank’s asset-purchase program.

There’s “an increasing nervousness over what decision they will make,” said Orlando Green, a rates strategist at Credit Agricole SA’s corporate and investment-banking unit in London.

Portuguese 10-year bond yields fell one basis point to 3.02 percent, having earlier climbed to 3.11 percent, the highest since July 27.

Portuguese government securities are the worst performers among the region’s sovereign debt this year through Monday, according to Bloomberg’s World Bond Indexes. They’ve handed investors a loss of 0.8 percent, compared with an average return across the euro area of 6.4 percent. Italy’s earned 4.7 percent, while Germany’s gained 6.5 percent.

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net. To contact the editors responsible for this story: David Goodman at dgoodman28@bloomberg.net, Keith Jenkins