Bloomberg News

German Bonds Rise as Stocks Drop, Investor Confidence Slumps

June 06, 2011

June 6 (Bloomberg) -- German government bonds climbed as stocks dropped and investor confidence slumped to the lowest level in eleven months.

German two-year securities rose for the first time in six days as a report showed producer-price inflation slowed in April. The Stoxx Europe 600 Index fell for the fourth straight day. Greek two-year note yields slid to a six-week low after European Union and International Monetary Fund officials agreed to pay the nation its next installment of aid. Portuguese debt climbed after the opposition Social Democrats ousted the ruling Socialists in elections yesterday.

“The primary driver for bunds is falling equities,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Markets are concerned that the current soft patch could be more prolonged and that’s helping core government bonds, including bunds.”

The 10-year bund yield declined four basis points to 3.02 percent as of 4:32 p.m. in London. It fell to 2.96 percent on June 3, the lowest since Jan. 12. The 3.25 percent security due July 2021 rose 0.315, or 3.15 euros per 1,000-euro ($1,461) face amount, to 101.925. Yields on two-year notes were three basis points lower at 1.66 percent.

The Stoxx Europe 600 fell 0.5 percent and the Standard and Poor’s 500 Index declined 0.3 percent. An index measuring sentiment in the 17-nation euro region dropped to 3.5 in June from 10.9 in May, the Sentix research institute in Limburg, Germany, said. A Bloomberg survey of economists had forecast the gauge would decline to 8.6.

Greek Accord

Factory-gate prices in the euro region rose 6.7 percent from a year earlier after increasing a revised 6.8 percent in March, the EU’s statistics office in Luxembourg said. That’s the first decline since August. Economists had projected a reading of 6.6 percent last month, according to the median of 21 estimates in another Bloomberg survey.

The yield on Greek two-year debt tumbled 25 basis points to 22.59 percent. It earlier dropped as much as 78 basis points to 22.07 percent, the lowest since April 21. Ten-year yields fell eight basis points to 15.86 percent.

The EU and IMF accord to pay the next installment to Greece under last year’s 110 billion-euro bailout paves the way for an upgraded aid package that includes a “voluntary” role for investors. Greek Prime Minister George Papandreou will aim to quell growing dissent this week within his Socialist party -- known as Pasok -- over the deeper austerity measures as voters’ patience wears thin and public protests mount.

‘Buying Time’

“It’s a question of buying a little bit more time for letting Greece prove that they can, or cannot, put the reforms in place, but also to reduce the risk of contagion maybe to some of the other economies,” Laurent Fransolet, head of European fixed-income strategy at Barclays Capital in London said in an interview on Bloomberg Television’s “The Pulse” with Maryam Nemazee.

Greece remains shut out of the financial markets a year after it became the first euro-region nation to request external assistance. Ireland and Portugal have since requested aid. The euro fell to a more than four-year low of $1.1877 on June 7, 2010, amid market fears of sovereign default.

While the shared European currency has recovered, touching a 17-month high of $1.4940 on May 4, bonds from Greece, Ireland and Portugal extended their fall, pushing yields to new euro-era records last month as the market sought assurance that default will be avoided.

Portuguese Election

Portugal’s Social Democrat leader Pedro Passos Coelho said he will seek to form a governing coalition with the third-placed People’s Party to enact austerity measures mandated by the nation’s 78 billion-euro bailout.

“Early results that the socialist party had lost power and that center-right parties would be able to form a new majority government, avoiding a potentially damaging political stalemate, should be seen as a positive development for Portuguese credit,” Huw Worthington, a fixed-income strategist at Barclays Plc in London, wrote in an e-mailed note today.

Portuguese 10-year yields fell four basis points to 9.77 percent, while the two-year note yield declined 14 basis points to 10.79 percent.

The European Central Bank remains on track to raise interest rates in July even as the euro region’s worsening debt crisis clouds the economic outlook in the run-up to its policy meeting on June 9, a Bloomberg survey shows. All 52 economists forecast the ECB will keep the benchmark rate at 1.25 percent at the June 9 meeting.

The Frankfurt-based central bank led by Jean-Claude Trichet may increase borrowing costs by 25 basis points in July, a separate survey showed.

‘Lost Momentum’

The “euroland economy has lost momentum in the second quarter, but it’s still expanding and that will prompt the ECB to keep raising rates,” Stamenkovic said.

Belgium’s 10-year bonds snapped a four-day advance, with yields climbing five basis points to 4.10 percent. The nation plans to sell 15-year securities through banks “in the near future,” according to an e-mailed statement from its debt agency in Brussels today. Barclays Capital, Fortis Bank SA/NV, HSBC Holdings Plc and ING Groep NV will manage the offering, the statement said.

Germany, the euro-region’s biggest economy, sold 4.57 billion euros of treasury bills maturing in December at an average yield of 1.1837 percent. Investors bid for 1.67 times the amount of securities on offer. France auctioned 8.1 billion euros of bills due from 84 to 357 days.

German government bonds have lost 0.3 percent this year, while U.S. Treasuries have returned 3 percent, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Greek bonds lost investors more than 11 percent in the period, with Portuguese debt down 14 percent, the indexes show.

--Editors: Mark McCord, Matthew Brown

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

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


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