Bloomberg News

Bunds Gain on German Export Slump, ‘Bearish’ Bernanke Comments

June 08, 2011

June 8 (Bloomberg) -- German government bonds advanced amid concern the pace of global economic growth is faltering after exports slumped and Federal Reserve Chairman Ben S. Bernanke said the U.S. recovery is “frustratingly slow.”

The gains pushed the 10-year bund yield down from almost the highest in more than two weeks as stocks fell and a report showed German industrial production unexpectedly shrank in April. Greek debt declined after German Finance Minister Wolfgang Schaeuble said bondholders should contribute a “substantial” share of a second aid package to Greece, proposing a bond exchange that credit-rating companies may term a default.

“It’s risk-off on the downbeat message from Bernanke and the news on Greece which says that effectively a deal is far from done after all the optimism we had last week,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “Bunds are supported.”

The 10-year bund yield fell four basis points to 3.05 percent as of 5:10 p.m. in London. It climbed yesterday to 3.10 percent, the highest since May 20. The 3.25 percent security due July 2021 rose 0.34, or 3.4 euros per 1,000-euro ($1,458) face amount, to 101.66. Yields on German two-year notes were also four basis points lower, at 1.66 percent.

The MSCI World Index of shares fell 0.7 percent, while the Stoxx Europe 600 Index dropped 1.1 percent.

German Data

German exports slid 5.5 percent in April from a month earlier, the Federal Statistics Office in Wiesbaden said today. Industrial production fell 0.6 percent from March, when it rose a revised 1.2 percent, the Economy Ministry in Berlin said today. Economists had forecast a gain of 0.2 percent, the median of 36 estimates in a Bloomberg News survey showed.

The European Central Bank is forecast to leave its benchmark rate at 1.25 percent at tomorrow’s meeting, according to all 52 economists in a Bloomberg survey. The Frankfurt-based central bank, led by Jean-Claude Trichet, may increase borrowing costs by 25 basis points in July, a separate survey showed.

Policy makers “are likely to upgrade their forecasts for growth and inflation and may signal a rate hike in July, so how far can German bunds rally when they know they have that immediate event risk?” said Ostwald. “That’s why the very front end of the curve isn’t getting much of a boost.”

Bernanke Comments

Data showed euro-area gross domestic product rose 0.8 percent in the first quarter from the fourth, when it gained 0.3 percent, in line with a May 13 estimate.

The U.S. economy is “still producing at levels well below its potential; consequently, accommodative monetary policies are still needed,” Bernanke said yesterday in a speech in Atlanta. At the same time, the Fed “will take whatever actions are necessary to keep inflation well controlled,” he said.

Greek 10-year government bonds fell, with the yield jumping 25 basis points to 16.14 percent. Two-year note yields surged 121 basis points to 23.92 percent.

Schaeuble told Trichet and euro finance ministers in a June 6 letter that maturities on Greek bonds should be extended seven years to give the nation time to overhaul its economy. That position clashes with the stance of European Commission officials and the ECB, which oppose anything beyond a voluntary rollover of debt.

The yield difference, or spread, between German 10-year bunds and similar maturity Greek debt widened 29 basis points to 1,309 basis points, or 13.09 percentage points.

‘Important Risks’

The Portuguese 10-year yield spread widened to a record 708 basis points, the most since Bloomberg began collecting the data in 1997, as the International Monetary Fund said its 26 billion- euro loan to Portugal “entails important risks.”

The measures attached to the loan “may fail to alleviate sovereign-debt concerns, with an adverse impact on government financing prospects,” IMF staff wrote in a May 17 report that was posted on the fund’s website yesterday. “In particular, refinancing risks from the closure or contraction of the Treasury bills market represent a near-term refinancing risk for the government.”

Other threats cited by the IMF staff include the needed support from Portugal’s population and from the political class, lower-than-expected growth and deepening problems in other European countries.

Portugal’s 10-year bond yield rose 18 basis points to 10.12 percent, after climbing to a record high of 10.14 percent. Irish securities of a similar maturity decline, with the yield10 basis points higher at 10.87 percent.

German government bonds have handed investors a loss of 0.4 percent this year, while U.S. Treasuries have returned more than 3 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek debt lost 11 percent in the period, the indexes show.

--With assistance from Brian Parkin and Alan Crawford in Berlin. Editors: Matthew Brown, Daniel Tilles

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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