Bloomberg News

German Bonds Advance as Retail Sales Drop; Belgian Notes Gain

September 30, 2011

Sept. 30 (Bloomberg) -- German bonds rose, paring the biggest weekly decline in three months, as stocks fell around the world and a report showed retail sales in the region’s largest economy slumped in August.

German two-year notes, perceived to be among Europe’s safest securities, snapped a four-day drop after data today showed China’s manufacturing contracted and U.S. consumer spending slowed. Belgian two-year notes rose for an eighth day on optimism eight-party talks will lead to a lower budget deficit. Irish debt headed for the best quarterly return among 26 markets tracked by European Federation of Financial Analysts Societies indexes.

“It’s a combination of fears that a recession could be imminent and at the same time about the ongoing crisis and how policy makers are reacting,” said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht. “Much can still go wrong at this stage and in this sense we are keeping a bullish view on bunds.”

The yield on 10-year bunds slid 12 basis points to 1.89 percent at 4:25 p.m. in London, trimming this week’s increase to 14 basis points, the most since the period ending July 1. The 2.25 percent security due September 2021 rose 1.11, or 11.10 euros per 1,000-euro ($1,342) face amount, to 103.275. Two-year yields dropped five basis points to 0.55 percent.

The Stoxx Europe 600 Index of shares lost 1.6 percent, and the Standard & Poor’s 500 Index dropped 0.9 percent.

Retail Sales

Bunds advanced along with U.S. Treasuries after the Federal Statistics Office said German retail sales fell 2.9 percent last month. HSBC Holdings Plc and Markit Economics said their Chinese purchasing managers’ index was unchanged at 49.9 in September, a third month it has stayed below 50 which indicates a contraction. U.S. consumer spending rose 0.2 percent after a 0.7 percent increase in July, the Commerce Department said.

Bonds in Germany and other so-called core euro-region countries have rallied in the last three months as data added to speculation the European economy is slipping back into recession and leaders remained divided over how to solve the debt crisis.

German bunds have returned 7.2 percent this quarter, according to the indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Irish government debt gained 29 percent, Italian bonds have dropped 4.3 percent, and Greek bonds have tumbled 25 percent.

Belgian Bonds

Belgian two-year notes rose for an eighth day after caretaker Prime Minister Yves Leterme said this week that Elio Di Rupo, the president of the country’s French-speaking Socialist Party, and his coalition negotiators may be ready with a 2012 budget by the end of October.

The two-year yield slid five basis points to 1.80 percent after dropping to 1.75 percent, the lowest level since Dec. 9.

“You’ve seen people reallocating back to names that they’re more comfortable with in the periphery and Belgium is one of those,” said Harvinder Sian, senior interest-rate strategist at Royal Bank of Scotland Group Plc. “The political situation certainly does help in that regard.”

Greek two-year notes rose for a fourth day, with the yield falling 307 basis points to 62.17 percent. The 10-year yield dropped two basis points to 22.66 percent.

Irish two-year notes fell for the first time in a week, pushing the yield up 42 basis points to 7.46 percent. The rate has still declined 167 basis points over the past five days.

Austrian Approval

Austria today became the latest country to authorize the expanded powers for the European rescue fund, the European Financial Stability Facility. Countries yet to ratify the changes are Malta, the Netherlands and Slovakia.

“We still see quite a lot of risks surrounding the Europeans,” said Andrew Balls, head of European portfolio management at Pacific Investment Management Co. “The EFSF is a positive step but at the same time they’re talking about reopening the debate on Greek haircuts and that could be destabilizing in the short term” He spoke in an interview on Bloomberg Television’s “The Pulse” with Francine Lacqua.

Volatility on German sovereign debt was the highest among euro-area markets today, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. The yield change in the nation’s 10-year bonds was 2.2 times the 90- day average, the Bloomberg gauge showed.

--Editors: Matthew Brown, Nicholas Reynolds

To contact the reporters on this story: Lukanyo Mnyanda in London at; Lucy Meakin in London at

To contact the editor responsible for this story: Daniel Tilles at

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