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Yields Begin to Rise Again in Europe, Economists Warn of Another “Acute Crisis”

“European leaders lulled into complacency by Mario Draghi’s pledge to buy their bonds may be stumbling toward the next euro-region emergency.

Policy makers are squandering the decline in borrowing costs triggered by the European Central Bank president’s commitment to defend the single currency, leaving the 17-nation bloc’s economy and financial systems vulnerable, according to economists Charles Wyplosz and Paul De Grauwe.

“I don’t see how we avoid having another acute crisis now that governments are so pleased with themselves,” Wyplosz, director of the International Center for Money and Banking Studies in Geneva, said in a telephone interview. “The wave of optimism we had was unjustified. Key elements of the crisis aren’t being dealt with.”

Concern that political turbulence would deepen backsliding has rattled markets. Ten-year bond yields in Spain and Italy rose this week to their highest of 2013 as Spanish Premier Mariano Rajoy faced opposition calls to resign amid contested reports of corruption in his party and Italy’s Silvio Berlusconi narrowed the front-runner’s lead before elections in three weeks.

Italian government bonds slid today with the yield on 10- year notes rising 1 basis point to 4.47 percent at 12:56 p.m. in Rome. Spain’s benchmark stock index fell 0.3 percent while the country’s 10-year bonds rose.

“The crisis has never been over,” said de Grauwe, a professor at the London School of Economics and a two-time candidate for a seat on the ECB’s Executive Board. “If this reversal goes on we’ll get a new stage and the ECB will have to act or it will lose credibility.” …”

Draghi’s Pledge…”

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Italian Bond Yields Take a Break Giving Hope to Investors

Italy’s two-year notes advanced, pushing yields down the most in three weeks, amid easing investor concern that budget reforms will be derailed as former Prime Minister Silvio Berlusconi seeks a political comeback.

Italian 10-year yields rose above 4.50 percent for the first time this year. A report showed European services output in January shrank less than initially estimated. German 10-year bonds snapped a three-day advance as European stocks gained, sapping demand for the safest assets. Spanish notes rose, after falling for four days, as Prime Minister Mariano Rajoy battled to rebut corruption allegations.

Italian two-year yields declined 10 basis points, or 0.10 percentage point, to 1.63 percent at 10:28 a.m. London time, the steepest slide since Jan. 10. The 6 percent security due November 2014 rose 0.17 or 1.70 euros per 1,000 euro ($1,354) face amount, to 107.57.

“It is perhaps too soon to conclude that this is the long- awaited reality check by the market,” said Elwin de Groot, a market economist at Rabobank Nederland in Utrecht, the Netherlands. “Political factors such as we are seeing in Spain and Italy at the moment are always extremely difficult to gauge. This could weigh on Spanish and Italian bonds for some time but we should acknowledge the rally in markets since mid-2012.”

Yields on Spanish 10-year bonds were little changed at 5.44 percent while those on securities due in two years declined three basis points to 2.85 percent.

Services Industry…”

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Japan’s Largest Pension Fund Will Begin to Reduce Bond Exposure as Samurai Abe Goes Wild

Japan’s public pension fund, the world’s biggest manager of retirement savings, is considering the first change to its asset balance as a new government’s policies could erode the value of $747 billion in local bonds.

Managers of the Government Pension Investment Fund, which oversees about 108 trillion yen ($1.16 trillion) in assets, will begin talks in April about reducing its 67 percent target allocation to domestic bonds, President Takahiro Mitani said in a Feb. 1 interview in Tokyo. The fund may increase holdings in emerging market stocks and start buying alternative assets.

The GPIF, created in 2006, didn’t alter the structure of its holdings during the worst global financial crisis in 80 years or in response to the 2011 earthquake and nuclear disaster. Prime Minister Shinzo Abe and the Bank of Japan (8301) have pledged to restore economic growth and spur inflation, which will mean higher interest rates, Mitani said.

“If we think about the future and if interest rates go up, then 67 percent in bonds does look harsh,” said Mitani, who was appointed in 2010 after serving as an executive director at the Bank of Japan. “We will review this soon. We will begin discussions for this in April-to-May. Any changes to our portfolio could begin at the end of the next fiscal year.”

GPIF, one of the biggest buyers of Japanese government bonds, held 69.3 trillion yen, or 64 percent of total assets, in domestic debt at the end of September, according to its latest quarterly financial statement. That compares with 12 trillion yen, or 11 percent, in Japanese stocks; 9.6 trillion yen, or 9 percent, in foreign bonds; and 12.6 trillion yen, or 12 percent, in overseas stocks.

Relative Yield

The fund, which took over management of government employee retirement savings when it was set up, returned to profit in the three months ended Dec. 31 from a 1.4 percent loss in the first six months of the fiscal year, Mitani said. He declined to be more specific. It needs to raise about 6.4 trillion yen this fiscal year through March 31 to meet payments.

The yield on Japan’s 10-year government bond climbed 3.5 basis points to 0.8 percent as of 4:35 p.m. in Tokyo today. By comparison, the projected dividend yield for the Topix Index (TPX), the country’s broadest measure of equity performance, is 2.05 percent. The Topix added 1.4 percent today.

Japan’s bonds handed investors a 1.8 percent return in 2012, according to a Bank of America Merrill Lynch Index, compared with the 18 percent surge in the Topix….”

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The Fed Now Owns 29% of All Ten Year Treasuries Outstanding

“With the Fed purchasing $45 billion in Treasury securities across the curve each month, keeping a consistent picture of Ben Bernanke’s consolidated, risk-adjusted holdings can be somewhat problematic: the best way to do this is to represent the Fed’s $3 trillion balance sheet, of which $1.7 trillion is in Treasurys, in the form of ten year equivalents. A ten-year equivalent is the amount of 10-year notes that must be held by the Fed in order to remove the same amount of interest rate risk from the market as its current holdings. This allows for a uniform representation that eliminates the duration variance along the curve. Looked in this light it may come as a surprise to some that as of this moment, the Fed now owns some 29% of the entire amount of marketable ten-year equivalents outstanding in the entire US bond market….”

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U.K. Borrowing Costs Rise as BoE Halts QE

“The U.K. government bond market is undermining Prime Minister David Cameron’s own test of economic credibility, with yields climbing relative to global peers ever since the Bank of England halted its debt-purchase program.

Gilts have lost 2.3 percent since the central bank said it would stop buying them in November. Only Sweden gave a worse return among 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies. At 2.06 percent, the 10-year yield is close to a nine-month high, and up from the record-low 1.407 percent set on July 23. The average over the past decade is 3.96 percent.

Britain’s borrowing costs relative to global averages rose this month to the highest since October 2011, thwarting Cameron after he said on Jan. 6 that the “real test” of his economic policy is the interest rate investors demand to own U.K. debt. As the government cuts spending to reduce the deficit, the nation is on the brink of a triple-dip recession and the premier’sConservative Party trails the opposition Labour Party in opinion polls.

“Putting your credibility in the hands of the market is risky, if yields go higher then you’ve lost your main trump card,” saidAlan Clarke, an economist in London at Scotiabank Europe Plc, one of 21 financial institutions that trade directly with the U.K’s Debt Management Office. “The government is playing a dangerous game.”…”

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Treasuries Fall for a Fifth Day Into Today’s Fed Meeting

“Treasuries traded at almost he highest level since April as global stocks gained before Federal Reserve policy makers end a two-day meeting today.

Benchmark notes were little changed as companies in the U.S. added more workers than forecast in January, according to a private report based on payrolls. Fed Chairman Ben S. Bernanke’s latest round of bond buying will reach $1.14 trillion before he ends the program in the first quarter of 2014, according to the median estimate in a Bloomberg News survey of economists. The Treasury auctions $29 billion of debt due in January 2020 today, the last of $99 billion of note sales this week.

“We expect the Fed will hold where we have been in terms of policy — the economy didn’t do as well as expected,” said Steven Ricchiuto, chief economist in New York at Mizuho Securities USA Inc., one of 21 primary dealers that deal directly with the Fed. “On ADP, we had a downward revision to the previous month. ADP is not telling us much about payrolls.”

The 10-year yield rose one basis point, or 0.01 percentage point, to 2.01 percent at 8:24 a.m.New York time after touching 2.03 percent, the highest since April 25, according to Bloomberg Bond Trader data.

Treasury yields may rise to 2.25 percent within three- to six months, von Mehren said….”

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Japan to Sell Inflation Linked Bonds After a 5 Year Respite


Japan plans to sell its first inflation-lined bonds in almost five years after it stopped offering the securities amid a lack of demand.

The Ministry of Finance will seek to sell several hundred billion yen of inflation-linked debt in the fiscal year starting in April, according to two government officials speaking on condition of anonymity due to the government’s policy.

A majority of institutional investors said they aren’t considering buying the so-called linkers, ministry officials told reporters in Tokyo on Jan. 22 after a meeting with bond dealers. Some primary dealers, those obliged to bid at the government auctions, suggested the resumption of sales should be delayed until the second half of the fiscal year.

Barclays Capital analyst Chotaro Morita said in note today that he anticipates that the ministry will sell the debt as early as July-to-September this year.”

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Australian Bonds Fall on China GDP Data, Oddly The Currency Does Too

Australia’s bonds fell, pushing the benchmark 10-year yield up by the most in two weeks, after data showed economic growth in China exceeded economist estimates, supporting export prospects.

The rate on the three-year note also posted its biggest one-day advance in two weeks amid gains in Chinese industrial production and retail sales, boosting bets the Reserve Bank of Australia will keep borrowing costs unchanged when officials meet next month. New Zealand’s currency, known as the kiwi, weakened following a report that showed an unexpected drop in the nation’s consumer prices.

“All signs point to a modest pickup in Chinese growth towards the end of the year,” said Michael Turner, a fixed- income strategist in Sydney at Royal Bank of Canada. “It probably suggests the RBA will be comfortably on hold to February, if not March, which should keep the upward bias to yields in the near-term.”

Australia’s 10-year yield rose 12 basis points, or 0.12 percentage point, to 3.41 percent at 5:01 p.m. in Sydney, the biggest advance since Jan. 2. The rate on three-year securities climbed 10 basis points to 2.81 percent, also the largest increase since Jan. 2.

The Australian dollar fell 0.2 percent to $1.0522 and was little changed at 94.76 yen. Its New Zealand counterpart dropped 0.1 percent to 83.57 U.S. cents and rose 0.1 percent to 75.26 yen.

Chinese Growth

Gross domestic product in China, Australia’s biggest trading partner and New Zealand’s second-largest export destination, rose 7.9 percent in the fourth quarter from a year earlier, according to a report today by the National Bureau of Statistics. That compared with the 7.8 percent median estimate in a Bloomberg News survey and a 7.4 percent gain in the previous period.

Industrial output in December rose a more-than-expected 10.3 percent from the prior year, while retail sales climbed 15.2 percent….”

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German Bunds Drop as Investors Feel an Air of Safety in Equities

“German government debt fell, with two-year yields rising to the highest since June, on speculation financial institutions will begin paying back loans from the European Central Bank, pushing up overnight borrowing rates.

Implied yields on Euribor futures contracts jumped and securities from Austria, France and the Netherlands also slid. French 10-year rates rose to the highest in more than two months as yields increased at an auction. Repayments of loans taken from the ECB’s Longer-Term Refinancing Operation will be possible from the end of this month.

“There is some selling pressure in the short-dated core notes and that’s driven primarily by speculation that banks will pay back LTRO and drive overnight rates higher,” said Soeren Moerch, the head of government-bond trading at Danske Bank A/S (DANSKE) in Copenhagen. “The market is badly positioned for this and that caused a bit of a selloff….”

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Abe Has Got Bernanke’s Back With a Half Trillion in Bond Purchases

“Shinzo Abe is set to become the best friend of investors in Treasuries as Japan’s prime minister buys U.S. government bonds to weaken the yen and boost his nation’s slowing economy.

Abe’s Liberal Democratic Party pledged to consider a fund to buy foreign securities that may amount to 50 trillion yen ($558 billion) according to Nomura Securities Co. and Kazumasa Iwata, a former Bank of Japan deputy governor. JPMorgan Securities Japan Co. says the total may be double that. The purchases would further weaken a currency that has depreciated 12 percent in four months as the nation suffers through its third recession since 2008….”

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U.S. Treasuries Have Worst Start to a Year Since 2009

“Treasuries are off to their worst start to a year since 2009 as money managers prepared to bid at three sales of notes and bonds totaling $66 billion this week, starting with a $32 billion three-year debt auction today.

U.S. government securities, little changed today, handed investors a 0.7 percent loss in 2013 as of yesterday, according to Bank of America Merrill Lynch indexes. It was the biggest decline for a first week since the Treasury was preparing to ramp up debt sales four years ago as it tried to snap a recession. Bonds slid after the Federal Reserve indicated it may stop its debt purchases in 2013 and as lawmakers averted the so- called fiscal cliff of spending cuts and tax increases….”

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German Bunds Fall as Italian and Spanish Debt Rise

“German government bonds slumped, with 10-year yields rising the most in more than three months, after U.S. lawmakers passed a bill undoing income tax increases threatening growth in the world’s largest economy.

Finnish and Dutch securities also fell as investors shunned refuge assets even though Republicans vowed to fight President Barack Obama for spending cuts in exchange for raising the debt ceiling. Italian bonds rallied, with 10-year yields dropping to the lowest since December 2010, as the tax deal spurred demand for higher-yielding securities. Germany sold 4.15 billion euros ($5.5 billion) of two-year notes, with the sale resulting in a positive yield for the first time since October.

“The compromise on the U.S. fiscal cliff is dominating risk sentiment,” said Rainer Guntermann, a fixed-income strategist at Commerzbank AG in Frankfurt. “It’s a pro-risk environment and bund yields should correct a bit higher.”

Germany’s 10-year yield rose 11 basis points, or 0.11 percentage point, to 1.43 percent at 10:38 a.m. London time after climbing as much as 12 basis points, the biggest increase since Sept. 14. The 1.5 percent bond due September 2022 declined 1.005, or 10.05 euros per 1,000-euro face amount, to 100.655.

The U.S. House of Representatives voted in favor of the Senate’s budget legislation as Republican lawmakers abandoned efforts to add spending cuts to the bill, removing an impediment to growth. The 257-167 bipartisan vote breaks a yearlong impasse over how to head off $600 billion in tax increases and spending cuts set to start taking effect yesterday….”

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Treasuries Fall Over Fiscal Cliff Procrastination

“Treasuries held a three-day gain as Democrat and Republican lawmakers have just hours left to agree on a budget deal that both sides say is necessary to prevent a blow to the nation’s economy.

U.S. government securities gave up their first-place rank among world bonds in 2012 as signs of improvement in the global economy cut demand for the safety of Treasuries. Benchmark notes rose last week as lawmakers failed to reach agreement to avoid the so-called fiscal cliff of more than $600 billion in spending cuts and tax increases set to start tomorrow. Allowing those changes to take effect would cause a recession in the first half of 2013, according to theCongressional Budget Office.

“We’ve had a pretty significant move in Treasuries in the past few days,” said Owen Callan, an analyst at Danske Bank A/S (DANSKE) in Dublin. “The market got quite complacent and assumed a deal would be done a lot earlier. It does appear that the two parties are still some way apart but I still think they will come up with some kind of deal or stopgap. Both sides recognize the danger of not coming to an agreement.”

The 10-year yield was little changed at 1.70 percent at 7:37 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 was at 99 11/32. Ten-year yields declined six basis points last week….”

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Spreads Between U.S. Treasuries and Bunds Widen the Most This Year

“The extra yield 10-year Treasuries offer over same-maturity German bunds approached the most in eight months on speculation the U.S. economy will grow faster than Europe’s in 2013.

The difference between the two rates was 39 basis points. The spread widened to 41 basis points on Dec. 18, which was the most since April. U.S. house prices in 20 cities probably rose 4 percent in the 12 months ended Oct. 31, the best performance since June 2010, based on a Bloomberg News survey of economists before the S&P/Case-Shiller report at 9 a.m. in New York today.

“U.S. economic growth is much faster than European growth,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “The U.S. 10-year yield may go a bit higher. The rise in German yields will lag behind the U.S.”

Benchmark U.S. 10-year yields were little changed at 1.77 percent as of the 3 p.m. close inTokyo, according to Bloomberg Bond Trader prices. The price of the 1.625 percent security due in November 2022 was 98 22/32. The rate has climbed from the record low of 1.38 percent set in July. It compares with the average of 3.66 percent for the past decade.

Trading in Treasuries closed in Japan and will stay shut in the U.K. for Boxing Day, according to the Securities Industry and Financial Markets Association. It will open as usual in New York today after being shut yesterday around the world for Christmas, according to the website.

Germany’s 10-year note yielded 1.38 percent as of the end of last week before trading stopped for the Christmas holidays…”

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Bond Outflows Seen For the First Time in 30 Weeks, Largest Outflow in 70

” “Did The Fed Just Tighten?”

This is the hot new question more and more people are asking.

The reason people are asking that is this: Last week, the Fed announced that it was getting rid of its guidance that it would hold rates low until 2015, and that it would instead aim for low rates until unemployment was around 6.5% or inflation expectations were around 2.5%.

The growing chatter is that we could start seeing these thresholds before 2015, particularly if the economy gets out of the liquidity trap, and returns to trend or above-trend growth, as today’s GDP report suggests is beginning to happen.

That specific question ‘Did the Fed just tighten?’ is asked by BofA/ML’s Chief Investment Strategist Michael Hartnett, in his new note on “Contrarian thoughts” for the year 2012.

He notes:

We find the change in the Fed’s “exit strategy” from its zero interest rate policy from late-2015 to an economic threshold of unemployment below 6.5% (and manageable inflation) to be very interesting. In our view, this brings into question the expectation that high liquidity is here to stay, and is perhaps a reason why gold prices have struggled this year….”

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While Buying Fluctuates, China Appears to Shun U.S. Debt

“China has stopped buying Treasurys, as it diversifies its foreign-exchange investments.

Actually, that’s not completely accurate. While the amount of China’s Treasury holdings varies from month to month, it’s down sharply from its peak.

China owned $1.16 trillion of Treasurys as of October, down 12 percent from a record high of $1.31 trillion in July 2011. ,,”

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Treasury: Foreign Demand for U.S. Assets Weak

“NEW YORK (Reuters) – Foreigners ditched U.S. equities and cut mortgage-backed debt in October in favor of government bonds, U.S. Treasury data showed on Monday, as market and global economic uncertainty increased.
Overall, overseas investors bought $1.3 billion in long-term U.S. securities, the fewest in at least three years, with much of the selling coming at the expense of stocks and bonds issued or guaranteed by the biggest U.S. mortgage financing agencies.
The shift appeared to reverse the heavy purchases of stocks and mortgage-related bonds seen in September after the Federal Reserve announced plans to start buying $40 billion of mortgage debt per month to cut long-term interest rates and stoke growth.
“It looks like we’re seeing an unwind of the post-QE 3 trade,” said TD Securities U.S. strategist Gennadiy Goldberg, referring to the Fed’s third round of monetary easing, known as quantitative easing, or QE.
When including short-term assets such as bills, Treasury data showed foreigners were net sellers of U.S. assets to the tune of $56.7 billion, the largest outflow since July 2011.
Some of the shift may reflect demand for higher-yielding assets abroad, analysts said. By suppressing rates and flooding the system with dollars, the Fed’s several asset-buying programs have weighed on the greenback and dulled the appeal of dollar-denominated assets…”

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With the Fed Announcement Why are We Seeing a Selloff in Bonds?

“The Fed has announced that in addition to the $40 billion of monthly MBS purchases, it will also commence $45 billion in treasury purchases. This unprecedented open-ended program will swell bank reserves and ratchet up the monetary base.

The announcement of this new asset purchase program should be a big positive for treasuries, right? Turns out that it wasn’t. Longer dated treasuries rallied immediately after the announcement, but sold off shortly after, now trading at the lows for the week (see charts below).

With the FOMC doves running the show, the Fed announced it would target a specific combination of unemployment and short-term inflation expectations.

Bloomberg: – Thirty-year yields reached a one-month high after the Federal Open Market Committee said interest rates will stay low “at least as long” as the jobless rate stays above 6.5 percent and inflation “between one and two years ahead” is at no more than 2.5 percent.

The two-year inflation expectation (the so-called breakeven rate) however now stands at about 1.3% – which means the Fed has given itself quite a bit of room to get to 2.5%. And that was the reason for the selloff – such an open-ended policy clearly runs inflation risks.

Bloomberg: – “The Fed is losing some of its credibility as an inflation fighter,”

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Aussie Bonds Drop While Currency Rises on Fed Decision

Australia’s bonds fell, pushing 10- year yields to the highest since September, after a Federal Reserve decision to stimulate the economy by expanding Treasury buying crimped investor appetite for safer assets.

The Australian dollar traded near the highest level in almost three months versus its U.S. peer, which tends to be debased by expansionary monetary policy. The Federal Open Market Committee said interest rates will stay low as long as U.S. unemployment remains above 6.5 percent and inflation is in check. The Australian and New Zealand dollars were buoyed as global equities gained and before a private report tomorrow forecast to show Chinese manufacturing is strengthening.

“The market is starting to reflect the global economic backdrop that is looking somewhat better than it had over recent times,” said Gavin Stacey, chief interest-rate strategist in Sydney at Barclays Plc, referring to Australian bond yields. “We think yields in general across the curve are likely to grind higher.”

The 10-year Australian rate rose nine basis points, or 0.09 percentage point, to 3.31 percent as of 4:10 p.m. in Sydney. The equivalent U.S. yield reached 1.72 percent, the most since Nov. 7.

Australia’s dollar was at $1.0551 from $1.0555 yesterday, when it climbed as high as $1.0586, the strongest since Sept. 14. The Australian dollar dropped versus its New Zealand counterpart to NZ$1.2491, the weakest since Oct. 12. The New Zealand dollar fetched 84.43 U.S. cents from 84.36 yesterday, when it touched 84.54, the most since Feb. 29.”

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Italian Bond Yields Rise as Support for Monti Fades

“Italian bonds fell for a second day as former Prime Minister Silvio Berlusconi’s political party threatened to stop supporting the government, risking the disintegration of the parliamentary coalition.

The decline pushed the 10-year yield up by the most in more than four months. Prime MinisterMario Monti survived a confidence vote after the head of Berlusconi’s People of Liberty party in the Senate said his group wouldn’t put the full weight of its support behind the bill. German bunds advanced for a third day after European Central Bank policy makers left interest ratesunchanged.

“Political risk has clearly increased in Italy today, even though Mr Monti survived,” said Nick Stamenkovic, a fixed- income strategist at RIA Capital Markets Ltd. in Edinburgh. “That’s undermined peripheral bonds, particularly Italy, and given a little bit of support to bunds.”

Italian 10-year yields jumped 11 basis points, or 0.11 percentage point, to 4.56 percent at 12:51 p.m. London time, after climbing as much as 18 basis points, the most since Aug. 2. The 5.5 percent bond due November 2022 fell 0.89, or 8.90 euros per 1,000-euro ($1,307) face amount, to 107.85. Two-year yields rose 12 basis points to 2.05 percent, after reaching 2.16 percent, the most since Nov. 21….”

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