Bloomberg News

German, French Notes Rise on Crisis Concern; Greek Notes Slide

October 25, 2011

Oct. 25 (Bloomberg) -- German and French two-year notes rose, with Germany’s yields dropping the most in seven weeks, amid speculation European leaders will fail to agree on a solution to the region’s debt crisis and avoid a Greek default.

The securities extended gains after the U.K. government said a meeting of European Union finance ministers scheduled for tomorrow had been canceled. The EU leaders’ summit will still take place as scheduled, the statement said. Greek notes fell, sending two-year yields toward a euro-era record. Spain sold 3.48 billion euros ($4.83 billion) of bills, and the Netherlands auctioned 2 billion euros of notes.

“If there’s any stumbling block or any sign of significant disunity, then without a doubt that will hurt the periphery and support German bonds,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “We have that divergence in terms of spread -- that seems to be the obvious way it will go.”

Two-year German yields fell 10 basis points, or 0.1 percentage point, to 0.56 percent at 3:59 p.m. London time. They earlier dropped 11 basis points, the most since Sept. 2. The 0.75 percent note due September 2013 rose 0.190, or 1.90 euros per 1,000-euro face amount, to 100.360. The 10-year rate slipped eight basis points to 2.05 percent.

France’s two-year yield slid 20 basis points to 1.20 percent, the biggest decline since Aug. 10. Finnish two-year rates fell 10 basis points to 0.73 percent, and similar-maturity Austrian paper decreased 12 basis points to 1.05 percent.

‘Important Decisions’

European Union leaders are seeking an agreement on boosting the region’s rescue fund, recapitalizing banks and providing debt relief to Greece to avoid contagion. Luxembourg’s Jean- Claude Juncker, who leads the group of euro-area finance ministers, said yesterday that talks on private-sector involvement in a second aid package for Greece are focusing on losses of 50 percent to 60 percent.

“The crisis isn’t going to be solved by one summit, even though important decisions might be taken,” said Viola Stork, a fixed-income strategist at Helaba Landesbank Hessen-Thueringen in Frankfurt. “German bunds remain sought after, which shows the uncertainty that’s in the market.”

The extra yield, or spread, investors receive for holding 10-year bunds instead of two-year notes climbed to 149 basis points, the widest since Oct. 17. The spread for French bonds expanded to 197 basis points, the most since Aug. 11.

Greek Notes

Greek two-year notes fell for an eighth day, pushing the yield up as much as 289 basis points to 81.20 percent, the highest level since Sept. 14, when it reached a record 84.52 percent. The yield last traded at 80.04 percent, leaving the price at 37.73.

Portugal’s 10-year yield increased for a 13th day, rising six basis points to 12.44 percent, after reaching 12.48 percent, the most since July 20.

“A significant and lasting market trend is unlikely to emerge” before there is a clearer picture of the Greek debt situation and how the bailout fund will be increased, said Norbert Aul, a European interest-rate strategist at RBC Capital Markets in London. Spreads “are likely to remain in a volatile range driven by the news flow,” he said.

Spain sold 3.48 billion euros of three- and six-month bills today, in line with its maximum target. The nation’s 10-year yields fell one basis point to 5.54 percent.

The Netherlands auctioned 1 billion euros of notes due in July 2015 at an average yield of 1.404 percent, and 1 billion euros of securities maturing in July 2019 at 2.304 percent. The Treasury had planned to sell as much as 3 billion euros of debt.

Record Low

German 10-year bund yields may fall more than 40 basis points to a record low by year-end as investors seek the euro- area’s safest assets, according to Commerzbank AG.

“Euro-based investors have to focus on the very limited, truly safe euro-zone assets out there,” said Christoph Rieger, head of fixed-income strategy at Commerzbank in Frankfurt. “Only a few government bond markets from Germany, the Netherlands and Finland count among those. We’re looking for lower yields by year-end. Ten-year bund yields could be printing all-time lows.”

The 10-year bund yield dropped to a record 1.64 percent on Sept. 23. Rieger was speaking with Bloomberg’s Ken Prewitt on Bloomberg Radio’s “The First Word.”

German bonds have returned 6.4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French debt gained 1.95 percent. Italian bonds lost 4.2 percent, even as the European Central Bank was said to buy the securities.

Volatility on French sovereign debt was the highest in euro-area markets today, followed by Finland’s, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

--With assistance from Nicholas Comfort and Aaron Kirchfeld in Frankfurt. Editors: Nicholas Reynolds, Matthew Brown,

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

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


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