Bloomberg News

German Bonds Fall Prey to Contagion; Italian, Spanish Debt Drops

November 26, 2011

Nov. 26 (Bloomberg) -- European bonds slumped after Germany failed to draw bids for 35 percent of the offered amount at an auction of 10-year bunds, stoking concern the region’s debt crisis is infecting even the safest sovereign securities.

Thirty-year German bonds slid, with yields rising the most since the week through Sept. 3, 2010, amid concern Germany will need to offer greater financial support to its euro-area peers. Italian two-year notes fell for a seventh week, driving yields to a euro-era record, and Spanish debt also tumbled as rates at government debt auctions surged. Belgian bonds dropped and the euro slid a fourth week.

“Non-residential investors are increasingly troubled by events,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “It was ignited by the 10- year bund auction result showing further credit dilution, and hasn’t been helped by the outcome of Italian sales.”

Thirty-year German bond yields rose 21 basis points to 2.83 percent at 4:54 p.m. London time yesterday, from 2.61 percent the week earlier.

Italian two-year yields jumped 156 basis points to 7.68 percent, Spanish rates on debt of similar maturity climbed 67 basis points to 6.10 percent, a euro-era record, and Belgian securities due September 2013 yielded 5.07 percent, from 3.97 percent on Nov. 18. The euro tumbled 2.1 percent to $1.3243.

German Auction

Total bids at the auction of German securities due in January 2022 amounted to 3.889 billion euros ($5.15 billion), out of a maximum target for the sale of 6 billion euros, sparking concern that the turmoil emanating from Greece’s debt crisis now risks engulfing the region’s biggest economy.

Lenders charged Spain a 5.11 percent rate for three-month notes, the most in the euro area, and costs for Italy escalated to 7.814 percent in a sale of zero-coupon notes due in September 2013.

With Belgium, France, Italy and Spain among euro-area issuers selling bonds next week, market participants are likely to “remain wary,” according to Lloyds’s Wand. Euro-area finance ministers are scheduled to meet in Brussels on Nov. 29.

German bonds have returned 6.9 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds lost 11 percent, and Spanish debt dropped 2.6 percent.

--Editors: Mark McCord, Nicholas Reynolds

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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


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