Bloomberg News

German, French Notes Rise as EU Official Says Talks Deadlocked

October 26, 2011

Oct. 26 (Bloomberg) -- German two-year notes rose, pushing yields below 0.50 percent for the first time in three weeks, after a European Union official said talks over a Greek rescue package are deadlocked and have been suspended.

French and Dutch two-year notes also gained as investors sought the highest-rated securities after German Chancellor Angela Merkel told lawmakers today that overcoming the principal causes of the debt crisis will “occupy us for years.” Italy’s two-year notes fell as the nation sold 10.5 billion euros ($14.6 billion) of bills and notes. Portuguese and Irish debt declined.

“We’re still waiting for the politicians to deliver and they are not delivering,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “The proposed plan, all it does is to buy them time to come up with a more durable solution. It puts a cap on German yields.”

German two-year yields fell five basis points, or 0.05 percentage point, to 0.52 percent at 4:37 p.m. London time, after dropping to 0.49 percent, the lowest since Oct. 6. The 0.75 percent note due September 2013 gained 0.090, or 90 euro cents per 1,000-euro face amount, to 100.435. The 10-year rate dropped three basis points to 2.03 percent.

The EU is seeking voluntary participation by banks, though a forced solution can’t be ruled out, the official said in Brussels on condition of anonymity as the talks are private. The dispute focused on how much of the risk of newly issued Greek bonds should be insured, the official said.

Brussels Summit

EU leaders meet today for the second summit in four days to try to reach an agreement to bolster the region’s rescue fund, strengthen banks and relieve Greece to avoid the contagion spreading to Italy. The 14th crisis summit in 21 months will start with a meeting of all 27 EU leaders at 6 p.m. in Brussels.

“There is scope for disappointment as the market is really interested in how the measures will be implemented and whether they will be viable,” said Norbert Aul, a European interest rate strategist at RBC Capital Markets in London.

France led gains by the region’s most highly rated securities, with its two-year yield dropping 10 basis points to 1.10 percent, after sliding 20 basis points yesterday. The Dutch two-year yield fell four basis points to 0.67 percent.

Portuguese two-year notes declined for a fourth day, pushing the yield up as much as 91 basis points to 19.06 percent, the highest since July 20. Irish two-year notes also fell for a fourth day, with the yield climbing 44 basis points to 9.45 percent, the most since Sept. 15.

Italian Bonds

Italian two-year notes dropped for a third day, with the yield rising five basis points to 4.56 percent.

The nation’s la Repubblica newspaper reported that Prime Minister Silvio Berlusconi agreed to step down by January and to bring elections forward to 2012.

Italy sold 8.5 billion euros of six-month bills at an average yield of 3.535 percent, and 2 billion euros of zero- coupon notes due in September 2013 at 4.628 percent. Demand for the six-month debt fell to 1.57 times the amount on offer, from 1.74 at the previous auction of similar-dated notes on Sept. 27.

Greek notes gained, with the two-year yield dropping 29 basis points to 79.76 percent, leaving the price at 37.71. The rate earlier rose as much as 343 basis points to 83.48 percent, the highest level since Sept. 14 when it climbed to a record 84.52 percent.

German bonds have returned 7 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 4.2 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, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. Swings on the 10-year yield were 2.2 times the 90-day average, the gauge showed.

--Editors: Nicholas Reynolds, Matthew Brown

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at; Keith Jenkins in London at

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

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