Bloomberg News

German Bonds Advance as Finance Ministers Gather at Euro Talks

October 03, 2011

Oct. 3 (Bloomberg) -- German government bonds rose for a third day as investors sought the safest assets as euro-region finance ministers gather to consider boosting the region’s rescue fund amid the risk of a Greek default.

Greece’s two-year bonds fell as the government promised new spending cuts, backed by its international creditors, in an attempt to safeguard aid payments. German Finance Minister Wolfgang Schaeuble said today that euro area countries should wait until changes to the current rescue fund are ratified before discussing an increase to its capacity. Spanish and Italian 10-year securities reversed declines as the European Central Bank was said to buy the nations’ bonds.

“There’s a pretty solid safe-haven bid,” said John Davies, a fixed-income strategist at WestLB AG in London. “As every day goes by without a level of official progress, the market becomes more uncertain and more nervous. There’s room for bund yields to travel back down and test the lows again as long as this nervousness persists.”

German 10-year yields declined eight basis points to 1.81 percent at 4:45 p.m. in London. They reached a record 1.636 percent on Sept. 23. The 2.25 percent security due September 2021 rose 0.69 or 6.9 euros per 1,000-euro ($1,337) face amount, to 103.94. Two-year yields dropped six basis points to 0.49 percent.

Manufacturing Gauge

Finance ministers from the 17-nation euro-region will weigh the threat of a Greek default, grapple with how to shield banks from the fallout, consider a further boost to their rescue fund and tackle the question of “governance,” or who will be in charge of a better-managed euro area, at today’s meeting, which was due to start at 5 p.m. Luxembourg time.

Speaking to reporters before the meeting, Schaeuble said that speculation on whether or not the fund will be leveraged makes no sense at this time.

The capacity of the EFSF is “sufficient,” Luxembourg Finance Minister Luc Frieden told reporters today.

Bonds in Germany and other so-called core euro-region countries rallied in the past three months as data added to speculation the European economy is slipping back into recession and as the region’s debt crisis intensified. Ten-year bund yields fell more than 1 percentage point in the third quarter.

A manufacturing gauge based on a survey of purchasing managers in the 17-nation euro region fell to 48.5 from 49 in August, London-based Markit Economics said today. That’s above an initial estimate for September of 48.4 published on Sept. 22. A reading below 50 indicates contraction.

Widening Spreads

“There’s nothing really in Europe to be that positive about,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “Higher-grade fixed income, like bunds, will continue to be well bid. The markets would like to see the crisis response taken to the next stage but I am not sure if there’s enough cohesion in Europe to widen the safety net.”

The yield premium investors get from holding French 10-year government bonds over German securities of a similar maturity increased four basis points to 76 basis points today. The difference in yield between Belgian 10-year bonds and German bunds widened six basis points to 182 basis points.

Dexia SA, the municipal lender rescued by France and Belgium in 2008, and Paris-based Societe Generale SA led a slide among European financial shares amid growing concern that the banks are having trouble funding themselves.

Greek Deficit

Greek two-year notes fell after the government yesterday pledged to fire workers as part of an austerity package designed to help secure disbursement of an 8 billion-euro loan payout this month and a second rescue of 109 billion euros agreed to by EU leaders on July 21.

The steps would leave Greece’s 2012 budget deficit equivalent to 6.8 percent of gross domestic product, missing the 6.5 percent goal previously set with the EU, International Monetary Fund and European Central Bank, known as the troika. The group’s inspectors agreed to the proposed 2012 budget.

“The news out of Greece over the weekend wasn’t great, with it admitting that it won’t meet the deficit targets,” West LB’s Davies said. “The market needs to see the next aid tranche paid.”

The Greek two-year note yields were 10 basis points higher at 62.27 percent, while the 10-year yield lost seven basis points to 22.62 percent.

Bailout packages for Greece, Ireland and Portugal and bond purchases by the European Central Bank have failed to stabilize markets and stop the debt crisis threatening to engulf Italy and Spain. The ECB began buying Spanish and Italian government securities on Aug. 8 to curb a surge in yields, according to traders who witnessed the deals.

Italian Bonds

The Frankfurt-based central bank bought debt from both nations today, according to four people with knowledge of the transactions, who asked not to be identified because the deals are confidential. A spokesman for the ECB declined to comment.

The ECB said today it settled 3.80 billion euros of bond purchases in the week through Sept. 30, down from 3.95 billion euros in the previous week. That’s the least since it resumed its government bond-buying program on Aug. 4.

Italian 10-year bonds rose for a third day, pushing the yield down one basis point to 5.53 percent. Earlier, the rate climbed 10 basis points to 5.63 percent. Spain’s 10-year bond yields fell two basis points to 5.11 percent after rising as much as five basis points earlier to 5.19 percent.

German government bonds returned 7.9 percent in the third quarter, leaving them with a 7.7 percent return in 2011, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Treasuries gained 6.5 percent last quarter while Greek bonds tumbled 25 percent, pushing their loss this year to 36 percent.

--Editors: Matthew Brown, Mark McCord

To contact the reporters on this story: Emma Charlton in London at; Lucy Meakin in London at

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

Steve Ballmer, Power Forward
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