Italian 10-year bonds fell, pushing yields toward the highestthis month, after the nation raised less than its maximum target atan auction of debt due between 2014 and 2022.

Portuguese and Spanish securities also declined and the euroweakened to a 15-month low against the dollar after Italy agreed topay a yield of 6.98 percent on securities maturing in 2022, closeto the 7 percent level that prompted euro-area peers to seekbailouts. German two-year yields fell to match a record low andbunds climbed for a third day as a government report showedinflation slowed in December.

“Yield levels around 7 percent are absolutely not sustainable,”said Michael Markovic, a senior fixed-income strategist at CreditSuisse Group AG in Zurich. “They could not sell the entire sizethey planned. It's not positive news for the stressedsovereign-debt markets in the euro zone.”

Italy's 10-year yield rose four basis points, or 0.04 percentagepoint, to 7.04 percent at 1:13 p.m. London time after climbing to7.14 percent on Dec. 27, the highest since Nov. 30. The 5 percentbond due in March 2022 dropped 0.27, or 2.70 euros per 1,000-euro($1,288) face amount, to 86.13.

Spanish 10-year yields climbed eight basis points to 5.23percent, and the rate on similar-maturity Portuguese securitiesincreased four basis points to 13.40 percent.

Volatility on Portugal's debt was the highest among 24 nationstracked by Bloomberg, according to measures of 10-year bonds, two-and 10-year yield spreads and credit-default swaps.

Italian bonds have handed investors a loss of 5.8 percent in2011, headed for the worst year since the European Federation ofFinancial Analysts Societies and Bloomberg started compilingindexes on the securities in 1992. They've slumped as concernpolicy makers aren't doing enough to tackle the debt crisisprompted banks and overseas funds to sell the nation's debt.

Longer-maturity bonds led losses today after the Treasury inRome sold 7.02 billion euros of debt, less than its maximum targetof 8.5 billion euros. It auctioned 2.5 billion euros of notes duein 2014, versus the maximum of 3 billion euros, and investors bidfor 1.36 times the amount of securities sold, from 1.5 times lastmonth. The yield fell to 5.62 percent, from 7.89 percent at theprevious sale on Nov. 29.

“Bid-cover ratios were low, but with this being year-end that isto be expected,” Peter Chatwell, a fixed-income strategist atCredit Agricole Corporate & Investment Bank in London, wrote ina note to clients. “The disappointment will mainly be that thedemand for the three-year failed to show any improvement above thenorm,” even after the European Central Bank provided 489 billioneuros of three-year loans to financial institutions last week, hesaid.

Euro Weakens

The euro fell as much as 0.6 percent to $1.2858, the weakestlevel since Sept. 14, 2010. The common currency dropped to 100.06yen, the 10-year low.

“I don't think it went well at all,” Mark Grant, a managingdirector at Southwest Securities Inc. in Fort Lauderdale, Florida,said about the Italian auction. “The bid- to-cover ratio was quiteworrying. It was certainly worrisome for future demand oflonger-term securities.”

Italy expects to raise almost 450 billion euros from debt salesnext year, enough to cover 202 billion euros of maturing bonds andfinance a 23.6 billion-euro deficit, Maria Cannata, director ofpublic debt, said in a Dec. 24 interview with newspaper Il Sole 24Ore.

Shorter-maturity Italian notes climbed as Prime Minister MarioMonti said his government will focus on making Italy's debtsustainable and doesn't “rule out” more aggressive efforts toreduce the existing stock of debt.

Three-year notes gained for a second day, with yields fallingtwo basis points to 5.85 percent.

German two-year yields matched yesterday's low of 0.142 percent,the least since Bloomberg began collecting the data in 1990. The10-year bund yield fell four basis points to 1.86 percent afterreaching 1.85 percent, the lowest since Nov. 18.

The German inflation rate, calculated using a harmonizedEuropean Union method, fell to 2.4 percent from 2.8 percent inNovember, the Federal Statistics Office said today. Slowerinflation helps preserve the purchasing power of the fixed incomefrom bonds.

Germany's government bonds have returned 9.4 percent this year,according to the Bloomberg/EFFAS indexes.

Bloomberg

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