Bloomberg News

German Notes Decline on Inflation, Auction; Ireland Bonds Gain

September 28, 2011

Sept. 28 (Bloomberg) -- German notes declined, with two- year yields rising to the highest level in two weeks, after government reports showed inflation accelerated to the fastest pace in three years in September.

Five-year notes fell for a fourth day as investors bid for fewer securities than were on offer at an auction today. Quicker inflation reduces the purchasing power of bond’s fixed payments, and makes it less likely the European Central Bank will cut interest rates next week. Ireland’s 10-year yields fell below 8 percent for the first time this year. Greek bonds gained for a second day.

“The market could see today’s inflation numbers as a good reason for the ECB to explain that a rate cut is not needed in the short term,” said Annalisa Piazza, a fixed-income strategist at Newedge Group SA in London. “German paper is quite expensive relative to other European countries, so demand is not as strong as it used to be.”

The two-year German yield rose two basis points to 0.56 percent at 4:04 p.m. in London, after increasing to 0.61 percent, the highest level since Sept. 15. The 0.75 percent security due September 2013 lost 0.045, or 45 euro cents per 1,000-euro ($1,361) face amount, to 100.375.

The five-year rate climbed three basis points to 1.24 percent and the 10-year yield was little changed at 1.96 percent

Inflation in Europe’s biggest economy accelerated more than economists forecast in September. The rate, calculated using a harmonized European Union method, increased to 2.8 percent, the most since September 2008, the Federal Statistics Office said.

German Auction

Germany received bids of 5.1 billion euros for the five- year notes it sold today, less than the maximum available 6 billion euros, according to the results from the Bundesbank. It allocated 5 billion euros to investors at an average yield of 1.22 percent, the lowest since Bloomberg began collecting the data in 1993.

“Clearly, the recent recovery in risk appetite is taking its toll here,” Michael Leister, a fixed-income strategist at WestLB AG in London, wrote in a client note today. “This does not come as a surprise, as five-year yields below 1.25 percent were unlikely to attract substantial real-money interest.”

Euribor futures declined, pushing the implied yield on the contract expiring in December up eight basis points to 1.27 percent, signaling investors have reduced wagers on lower interest rates. The ECB has increased its refinancing rate twice this year to 1.50 percent.

Core Countries

Bunds and securities of other so-called core countries gained this month as reports signaled the region’s economy is slipping back into a recession and the sovereign-debt crisis worsened. Bunds have gained 2 percent in September, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg.

Ireland’s 10-year bonds rose for a third day, pushing 10- year yields below 8 percent for the first time since Dec. 10. The rate decreased 37 basis points to 7.88 percent. The two-year note yield dropped 105 basis points to 7.41 percent.

The Greek 10-year rate fell 30 basis points to 23.02 percent, narrowing the extra yield investors get for holding the securities instead of bunds by 30 basis points to 21.05 percentage points.

German Chancellor Angela Merkel said she is awaiting a report from a team of officials from the European Union, ECB and International Monetary Fund on Greece’s progress before deciding whether the bailout accord of July 21 should be implemented.

‘All Disappointed’

“We are of course all disappointed by the fact that the numbers in September, as it appears, are different to those we were expecting,” Merkel told Athens-based state broadcaster NET. “That’s why we need to wait to see what the expert mission, the troika, determines and what it will say in relation to whether there needs to be new talks or not.”

Volatility on Ireland’s sovereign debt was the highest among developed-country markets today, according to measures of 10-year bonds, two-10-year spreads and credit-default swaps. The yield change in the nation’s 10-year bonds was 2.3 times the 90- day average, the Bloomberg gauge showed.

--With assistance Simone Meier in Zurich, Christian Vits in Frankfurt, Maria Petrakis in Athens, Tony Czuczka in Berlin and Paul Dobson in London. Editors: Nicholas Reynolds, Matthew Brown

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@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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