LONDON: Holders of Italian government bonds saw their year-to-date returns jump in the third quarter, and the paper is set to be one of the best performers in the euro zone this year.
Nonetheless, the high returns have failed to attract back the international investors who have been dumping the debt this year, leaving domestic banks as the main beneficiaries of the rally.
Year-to-date returns on Italian bonds across all maturities stood at 14.85 percent at the end of the third quarter, according to Markit iBoxx indexes, up from 8.5 percent three months earlier.
Bonds with maturities of more than 10 years returned more than 20 percent.
Spanish government bonds also fared better in the third quarter, posting a 0.3 percent return after sliding to a 3.7 percent year-to-date loss in the second quarter.
The returns take into account the change in the price of the bonds as well as coupon payments, assuming they are reinvested at current rates.
Although yields on bonds issued by Italy and Spain remain relatively high, they have fallen sharply since European Central Bank President Mario Draghi pledged at the end of July to do whatever it took to preserve the euro, following up with a plan to buy the bonds of struggling countries if they asked for aid.
If the pattern stays the same in the fourth quarter, Italian bonds will have offered investors the biggest return in the liquid euro zone bond markets, despite international investors staying well away this year.
"Italy can continue to do well, some of that will be people thinking they can make some serious money," said Luca Jellinek, European head of fixed income at Credit Agricole.
"But it will probably be a bit less of a motivator than ... normally because of the sheer volatility."
However, uncertainty over when, or if, Spain will ask for a bailout, as well concerns over the lack of economic growth in the euro zone also saw continued buying of safe-haven German Bunds.
Longer-dated German paper was the strongest performer, returning more than 6 percent. Bonds with maturities between one and three years fared less well, with a year-to-date return of just 0.4 percent due to yields being near or below zero for much of this year.
Investors searching for increased yield without too much additional risk helped lift bonds issued by Austria, Belgium and France.
UK Gilts and US Treasuries posted returns of 3.35 percent and 2.25 percent respectively .
Portugal remained the star performer with returns of nearly 45 percent but many of its bonds are held by the ECB or speculative investors with market conditions extremely illiquid.
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