(BN) Spanish, Italian Notes Gain as EU Leaders Move to Contain Crisis

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Spanish and Italian notes rose for a second week as euro-area leaders expanded steps to stem the debt crisis by easing repayment rules for emergency loans to Spain's banks and relaxing conditions on potential help for Italy.

The Italian two-year yield dropped to the lowest in a month after leaders of the euro nations also scrapped the requirement that governments get preferred-creditor status on crisis loans to the country's banks. German 30-year bunds dropped for a fourth week as optimism the financial turmoil will be contained reduced demand for the region's safest assets. Spanish and Italian bonds still made quarterly losses.

"Market expectations from the summit were low but the fact that we have some concrete plans is positive," Padhraic Garvey, head of developed debt markets at ING Groep NV in Amsterdam. "The deal on non-seniority for Spanish bailout loans is also a nod in the right direction."

Italy's two-year yield fell 30 basis points, or 0.3 percentage point, this week to 3.50 percent at 5 p.m. London time. The 3 percent note due in April 2014 gained 0.5, or 5 euros per 1,000-euro ($1,266) face amount, to 99.21. The yield dropped to 3.45 percent yesterday, the lowest since May 25.

Spanish two-year yields declined 16 basis points this week to 4.27 percent. Italian 10-year yields were little changed at 5.82 percent, while similar-maturity Spanish yields fell five basis points to 6.33 percent.

The accord among the European Union leaders paves the way for the European Commission, the EU's regulatory arm, to augment its proposals on deposit insurance, capital requirements and how to handle failing banks. German Chancellor Angela Merkel said after the summit that she maintained her rejection of issuing joint bonds.

'Key Positive'

"The key positive thing here is that we see some traction despite Germany digging its heels in on using bailout funds to support the market," said Richard McGuire, a senior fixed- income strategist at Rabobank International in London.

Germany's 30-year bund yield jumped eight basis points this week to 2.33 percent after rising to 2.45 percent, the highest level since April 26. Benchmark 10-year bunds were little changed, leaving the yield at 1.58 percent.

Spain will sell bonds maturing between 2015 and 2022 on July 5, while Germany, France and the Netherlands also auction bonds next week.

Spanish bonds handed investors a loss of 7.4 percent this quarter as of June 28, while Italian debt dropped 4.6 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds returned 2.1 percent.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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