Bloomberg News

Bunds Fall as Europe Optimism Saps Safety Bid; Greek Notes Drop

October 19, 2011

Oct. 19 (Bloomberg) -- German bunds fell for the first time in three days as stocks rose on speculation Europe’s leaders are making progress with plans to resolve the region’s debt crisis, boosting demand for higher-yielding assets.

Ten-year yields climbed from near a one-week low after the U.K.’s Guardian newspaper reported that Germany and France have agreed to boost the European Financial Stability Facility to 2 trillion euros ($2.76 trillion) from 440 billion euros. German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin that the bailout fund may be increased to a maximum of 1 trillion euros, Financial Times Deutschland reported. French, Spanish and Greek bonds also fell.

“It looks like it’s risk-on today,” pushing bund yields higher, said Rasmus Rousing, a fixed-income strategist at Credit Suisse Group AG in Zurich. “In terms of the political landscape in Europe, it’s still hard to filter the noise. There’s still a lot of volatility and uncertainty.”

German 10-year yields increased four basis points, or 0.04 percentage point, to 2.06 percent at 4:14 p.m. London time, after falling to 1.99 percent yesterday, the lowest since Oct. 10. The 2.5 percent bond due September 2021 dropped 0.395, or 3.95 euros per 1,000-euro face amount, to 101.705. The two-year yield increased three basis points to 0.61 percent.

The Stoxx Europe 600 Index advanced 0.4 percent, snapping a two-day decline.

Bank Assistance

Germany and France have also agreed to recapitalize banks, the Guardian said in its report yesterday, citing European Union diplomats. A person with direct knowledge of the discussions told Bloomberg News no deal has been reached on expanding the bailout fund. Euro-area leaders are scheduled to meet at a summit in Brussels on Oct. 23.

Bunds maintained losses after Germany sold 4.1 billion euros of 10-year debt, less than the maximum target of 5 billion euros, the Bundesbank said. The 2.25 percent bonds were sold at an average yield of 2.09 percent, while bids totaled 4.55 billion euros, the central bank said.

“German paper is very expensive,” said Annalisa Piazza, a fixed-income strategist at broker Newedge Group in London. “Any news that something is moving in terms of the development of the European crisis or any better-than-expected data was going to hit the long end of the curve.”

Spanish Bonds

Spanish bonds dropped for an eight day after Moody’s Investors Service cut the nation’s credit rating yesterday to its fifth-highest investment grade. The company lowered its assessment of Spain’s creditworthiness by two levels to A1 from Aa2, with the outlook remaining negative.

Spain’s 10-year yields climbed five basis points to 5.40 percent. Five-year rates also basis points to 4.70 percent.

Italy’s 10-year bonds fell for a second day even as the European Central Bank was said to buy the securities, according to two people with knowledge of the transactions who declined to be identified because the transactions are confidential. Yields rose four basis points to 5.90 percent.

“The financial markets remain very jittery,” Viola Stork and Ulrich Wortberg, analysts at Helaba Landesbank Hessen- Thueringen in Frankfurt, wrote in a client note today. Swings in bund yields this week show “just how fast the mood can turn around,” they wrote.

Yields on 10-year French debt increased four basis points to 3.18 percent, widening the spread or yield difference over similar maturity bunds to as much as 115 basis points, the most since 1992.

France’s Aaa credit rating is under pressure because the global financial and economic crisis has made its debt measures the weakest among its top-rated peers, Moody’s Investors Service said Oct. 17. The company said its statement was a market update and not a rating action.

Greek Bonds

Greek notes fell for a fourth day, with the two-year yield rising 13 basis points to 76.58 percent, leaving the price at 38.70. The yield on the benchmark 6.25 percent bonds due in June 2020 climbed two basis points to 24.30 percent.

Holders of Greek bonds will probably have to take a 60 percent loss as “there’s no way” for the country not to default, said Steven Cochrane, head of economic research at Moody’s Analytics Inc.

“Our assumption that we have fed into our forecast for the European economy is that bondholders of Greek debt will be taking a haircut of about 60 percent,” Cochrane said today at an event in Limassol, Cyprus.

German bonds have returned 7.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French debt gained 3.1 percent, and Treasuries rose 8 percent and Italian bonds lost 4 percent,.

Volatility on Austrian 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 0.9 times the 90- day average, the Bloomberg gauge showed.

--With assistance from Stelios Orphanides in Athens. Editors: Matthew Brown, Nicholas Reynolds

To contact the reporters on this story: Garth Theunissen in London at; Lukanyo Mnyanda in Edinburgh at;

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

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