Bloomberg News

German Bunds Fall for 6th Day After Auction; Italian Bonds Drop

October 12, 2011

Oct. 12 (Bloomberg) -- German 10-year bunds fell for a sixth day as stock gains and optimism European leaders are moving closer to resolving the sovereign debt crisis sapped demand for the region’s safest securities.

Thirty-year German yields climbed to the highest level in five weeks as an auction of the securities failed to attract enough bidders to reach the maximum target. Italian bonds led losses among the securities of the region’s high-deficit nations as the government prepares to sell up to 6.5 billion euros ($8.97 billion) of debt tomorrow. A measure of dollar funding costs for European banks dropped.

“The market at the moment is thinking that the solution of the debt crisis is going in the right direction and in that case there’s not much value” in longer-maturity German bonds, said Annalisa Piazza, an economist at Newedge Strategy in London.

The 10-year bund yield rose 11 basis points, or 0.11 percentage point, to 2.19 percent at 4:32 p.m. London time. The 2.25 percent bond due September 2021 slid 0.930, or 9.30 euros per 1,000-euro face amount, to 101.495. Thirty-year rates climbed 13 basis points to 2.94 percent, after reaching 2.95 percent, the highest since Sept. 2.

The European Union’s Economic and Monetary Affairs Commissioner Olli Rehn said progress is being made toward a consensus on resolving the debt crisis. European Commission President Jose Barroso called for a reinforcement of crisis-hit banks, the payout of a sixth loan to Greece and a faster start for a permanent rescue fund.

Slovak Agreement

Slovak parties have agreed to approve Europe’s enhanced bailout fund, paving the way for a second vote in coming days, opposition leader Robert Fico told reporters today. Slovakia is the only nation yet to pass the measures.

Treasury 10-year yields rose seven basis points to 2.22 percent, the Stoxx Europe 600 Index advanced 1.5 percent and the euro strengthened 1.2 percent to $1.3803.

Germany’s 30-year auction drew bids for 1.78 billion euros, less than the maximum sales target of 2 billion euros, the Bundesbank said. The average yield was 2.82 percent, versus 3.43 percent at the previous sale of the bonds on July 20.

The one-year cross-currency basis swap, the rate banks pay to convert euro payments into dollars, fell to 63 basis points below the euro interbank offered rate from 68 yesterday after six banks sought three-month dollar loans from the European Central Bank in a tender. That’s the narrowest since Sept. 16.

Italian Bonds

Italian 10-year bonds dropped for a fourth day, with the yield climbing 11 basis points to 5.74 percent, the highest since Sept. 22.

The nation will sell debt maturing between 2016 and 2025 tomorrow. Yields on the March 2025 bonds climbed three basis points to 6.31 percent, matching a record, based on closing- market rates, amid speculation the securities aren’t covered by ECB asset purchases.

“We have Italian supply tomorrow and there is a bond that is outside the ECB’s bond-buying program and so there’s some anxiety about how that’s going to go,” said Peter Schaffrik, head of European interest-rate strategy at Royal Bank of Canada’s RBC Capital Markets in London.

The ECB doesn’t disclose which bonds it is buying under its asset-purchase program. The central bank said Oct. 10 it settled 2.3 billion euros of debt purchases in the week through Oct. 7, down from 3.8 billion euros in the previous week. It has spent 90 billion euros on euro-region bonds since reactivating the plan, according to data compiled by Bloomberg.

Yields Widen

The spread between yields on Italian bonds due in 2025 and 2021 has widened by 54 basis points since the ECB reactivated its plan. It was 60 basis points today, compared with an average of 32 basis points over the past six months.

Spanish bonds dropped amid concern banks will need additional government financing. Spain’s 10-year bond yields climbed nine basis points to 5.12 percent.

“The market will be looking at the progress made on bank recapitalization,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “The idea is that banks needing capital should go to the market first and if that doesn’t work then they will ask their governments for capital. That’s where there is a feedback loop for the European debt crisis.”

Banks may be forced by the European Banking Authority to raise their core tier-one capital ratios to 9 percent, the Financial Times reported, citing senior regulators. The EBA asked lenders for more information on sovereign-debt holdings as part of its review of financial industry capital levels, four people familiar with the situation said yesterday.

Belgian 10-year rates rose six basis points to 4.23 percent after reaching 4.25 percent, the most since Aug. 9.

German bonds have handed investors a 1.1 percent loss this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, trimming year-to-date returns to 6.6 percent. Spanish bonds have handed investors 5.6 percent this year, and Italian debt made a loss of 2.7 percent.

--With assistance from Lucy Meakin in London. Editors: Nicholas Reynolds, Mark McCord

To contact the reporters on this story: Paul Dobson in London at pdobson2@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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