Bloomberg News

Bunds Climb, Italian, Spanish Bonds Drop After U.S. ISM Data

August 01, 2011

Aug. 1 (Bloomberg) -- Bunds rose while Italian and Spanish bonds dropped as an index of U.S. manufacturing fell more than forecast, fueling concern there will be a slowdown in the world’s largest economy and boosting demand for safer assets.

German government bond yields slumped to the lowest level since November amid speculation that the U.S. will lose its top credit rating, even after a deal was struck to raise the nation’s debt ceiling. The House of Representatives will vote today, possibly followed by a Senate vote, one day before the U.S. has predicted it will run out of cash. The additional yield investors demand to hold Italian bonds instead of benchmark bunds rose to a euro-era record.

“Anything globally which signifies weaker global growth is negative for peripherals and probably supports wider spreads,” said Steven Mansell, an interest-rate strategist at Citigroup Inc. in London. “Both Europe and the U.S. seem to be mired in weak growth. This is positive for bunds and not positive for those countries in Europe which have been struggling with high deficits and can’t grow their way out of it.”

Ten-year bund yields dropped six basis points to 2.48 percent at 4:22 p.m. in London, after earlier rising six basis points to 2.59 percent. The 3.25 percent security maturing in July 2021 rose 0.565, or 5.65 euros per 1,000-euro ($1,422) face amount, to 106.720. Yields on two-year notes were also five basis points lower, at 1.11 percent.

Italian, Spanish Spreads

The yield on 10-year Italian bonds rose 14 basis points to 6.01 percent, reversing an earlier decline and approaching the 6.027 percent euro-era record reached on July 18, before the latest bailout for Greece was announced.

The spread, or difference in yield, that investors demand to hold Italian debt instead of similar-maturity German bunds widened 20 basis points to 353 basis points, or 3.53 percentage points, the most since April 1996.

Yields on 10-year Spanish debt climbed 11 basis points to 6.19 percent, after dropping to 5.95 percent before the U.S. data was released. The Spanish-German yield spread widened to 372 basis points.

The Institute for Supply Management’s U.S. factory index fell to 50.9 last month from 55.3 in June, the Tempe, Arizona- based group said today. Economists projected the index would drop to 54.5, according to the median forecast in a Bloomberg News survey. Figures greater than 50 signal expansion.

‘Shocking’ Data

“You can call it a shocking number, which definitely underpins the deteriorating picture of the U.S. economy,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “Core markets are well supported and the peripheral markets in the euro area have little scope to recover in such a risk-off environment.”

European manufacturing growth weakened for a third month in July, data today showed, adding to signs that the region’s economy is losing momentum. A manufacturing gauge based on a survey of purchasing managers in the euro region fell to 50.4 from 52 in June, the lowest reading since October 2009, when it was below 50 for a 16th straight month. A number above 50 indicates expansion.

Italian Prime Minister Silvio Berlusconi will address the nation’s Parliament on Aug. 3, news agency Ansa reported today. Opposition parties have called on Berlusconi to speak to Parliament and the nation about the government’s plan to boost confidence in Italy’s ability to finance its debt.

Credit-Default Swaps

Spain and Italy led an increase in the cost of insuring European sovereign debt. Credit-default swaps on Spain jumped nine basis points to 374, approaching the record 385 set last month, according to CMA. Italy climbed seven to 323, nearing an all-time high of 331.

Swaps on Greece, Portugal, Ireland and Belgium also rose, pushing the Markit iTraxx SovX Western Europe Index of swaps on 15 governments up 5 basis points to 276.

France auctioned 8.5 billion euro of 84-, 175- and 357-day bills. The Netherlands sold 2.46 billion euros of three-month bills at an average yield of 0.9 percent, six-month bills at 1 percent and nine-month bills at 1.105 percent.

German government bonds handed investors 3 percent this year, compared with 4.3 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds have lost 0.2 percent, while Italian debt has slipped 3.5 percent and Portugal’s has declined 22 percent, the indexes show.

--With assistance from Abigail Moses in London. Editors: Keith Campbell, Peter Branton.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net.

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


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