Bloomberg News

German Bonds Drop for Third Week; French, Belgian Debt Slumps

October 15, 2011

Oct. 14 (Bloomberg) -- German 10-year bunds dropped for a third week, the longest streak of declines in six months, as European leaders made progress in resolving the debt crisis, sapping demand for the safest government securities.

Two-year German yields reached a six-week high as Slovakia approved Europe’s enhanced bailout fund, completing ratification across the 17 euro countries. French 10-year yields rose by the most since 1998 and Belgium’s bonds slumped amid speculation the nations will need to provide funding to backstop their banks, creating an additional burden on state finances. Spain’s 10-year bonds fell for the first week in four and Italian 10-year yields reached a 10-week high.

“There’s still some positive sentiment left out there” which is undermining support for bunds, said Elwin de Groot, senior market economist at Rabobank Nederland in Utrecht, Netherlands. “That’s obviously built on the prospect that Europe will finally make some important progress in battling the sovereign debt crisis.”

Ten-year German note yields were 20 basis points higher from last week at 2.20 percent as of 4:55 p.m. London time yesterday. They reached 2.22 percent yesterday, the most since Sept. 1. Two-year bund yields rose six basis points to 0.66 percent.

European officials are outlining a rescue plan that may include deeper investor losses on Greek bonds, higher bank capital levels and increased firepower for bailouts and the International Monetary Fund. The aim is to craft what French Finance Minister Francois Baroin yesterday called a “durable, complete package” to fix the turmoil.

French Spread

French 10-year government bonds dropped, pushing the yield up by 38 basis points, the most since the week ended Oct. 9, 1998. The decline pushed the difference in yield, or spread, between French and German bonds to the widest since the euro was introduced in 1999. Belgian 10-year bond yields advanced for a second week, adding 42 basis points to 4.40 percent.

Spain’s 10-year bond yields climbed 26 basis points to 5.25 percent as its credit rating was cut by Standard & Poor’s, which cited the weakening profile of the country’s banks. Italian 10- year bond yields climbed 27 basis points even as the European Central Bank bought the nation’s securities and those of Spain, according to people with knowledge of the transactions.

German Sale

Germany is scheduled to sell 5 billion euros of securities maturing in 2021 on Oct. 19. An index of investor and analyst expectations compiled by the ZEW Center for European Economic Research in Mannheim is forecast to decline to minus 45 in October from minus 43.3 in September, according to economists surveyed by Bloomberg before the Oct. 18 report.

German bonds have handed investors a 1.2 percent loss this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. That pared the year-to-date return to 6.5 percent. The safest euro-area debt securities are sliding amid optimism the region’s officials are moving closer to a comprehensive solution to the sovereign debt crisis.

French bonds have lost 1.9 percent this month, trimming year-to-date gains to 4.1 percent, the indexes show, while Italy’s have fallen 1 percent, extending this year’s loss to 3.7 percent.

--Editors: Mark McCord, Nicholas Reynolds

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net.

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


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