Bloomberg News

German Bunds Gain as Rescue-Fund Wrangling Boosts Refuge Demand

October 22, 2011

Oct. 22 (Bloomberg) -- German bunds posted their first weekly gain in a month as concern European leaders are struggling to agree on a permanent solution to the euro-area’s debt crisis boosted demand for the region’s safest assets.

Benchmark French debt fell for a fourth week, expanding the yield spread over bunds to the widest since 1992, after Moody’s Investors Service and Standard & Poor’s said the nation’s top credit rating is under pressure due to the regional crisis. European leaders are scheduled to meet at summits in Brussels tomorrow and on Oct. 26 to devise a plan to resolve the sovereign-debt turmoil. Spanish and Italian bonds also declined.

“Fixed-income markets clearly remain in a state of caution, with traditional spread relationships under strain,” Mark Schofield, head of interest-rate strategy at Citigroup Inc. in London, wrote in a note to clients Oct. 21. “The risks are still skewed to higher European Monetary Union yields and further spread widening.”

German 10-year yields dropped nine basis points this week to 2.11 percent at 4:31 p.m. London time yesterday, after rising 45 basis points over the previous three weeks. The 2.25 percent bond due September 2021 gained 0.75, or 7.50 euros per 1,000- euro face amount, to 101.195. The two-year rate was little changed this week at 0.66 percent.

Group of 20 officials concluded a meeting in Paris last weekend by setting the Oct. 23 summit as the deadline for completing a plan to avoid a Greek default, bolster euro-area banks and curb contagion to larger economies in the 17-nation region. Interim talks faltered after Germany and France disagreed on how to structure an expanded European bailout fund.

French Bonds

French bonds slid in the week, pushing yields to a three- month high, on concern the expanded bailout fund will put extra pressure on the nation’s finances.

The 10-year rate climbed 12 basis points to 3.25 percent, after rising to 3.28 percent on Oct. 19, the most since Aug. 8. The spread over similar-maturity bunds expanded to as much as 121 basis points, the widest since 1992 based on Bloomberg generic prices.

“France is the least able to afford the cost of an expanded bailout package among AAA nations,” said Lyn Graham- Taylor, a fixed-income strategist at Rabobank International in London. “They’ll probably eventually lose their AAA rating.”

Standard & Poor’s said yesterday that France is among euro- region sovereigns likely to be downgraded in a stressed economic scenario. Spain, Italy, Ireland and Portugal may also be reduced by one or two levels in either of New York-based S&P’s two stress scenarios, the company said in an report. Moody’s Investors Service warned on Oct. 17 that France risked losing its Aaa credit rating.

Recession Concern

Spanish 10-year bonds fell for a second week, with yields climbing 23 basis points to 5.48 percent. Italy’s 10-year yields rose 10 basis points to 5.90 percent in the week, even as people with knowledge of the transactions said the European Central Bank bought the securities.

Yields on benchmark Greek bonds due June 2020 rose 11 basis points in the week to 24.04 percent. Two-year yields surged 313 basis points to 77.27 percent.

Greek debt declined even as Prime Minister George Papandreou won a parliamentary vote on a new round of austerity designed to secure more financial aid, risking further unrest after strikes across the nation this week.

German government bonds have returned 7.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French debt gained 2.9 percent, Italian bonds lost 4.7 percent and Greek securities dropped 41 percent.

--Editors: Nicholas Reynolds, Mark McCord

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net

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


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