Bloomberg News

German Bunds Fall 6th Day on Funding Concern; Spanish Bonds Gain

November 29, 2011

Nov. 29 (Bloomberg) -- German bonds fell, pushing 30-year yields above those on Treasuries for the first time since 2009, on concern the nation will have to fund its weaker euro-region peers as Europe grapples to contain a sovereign debt crisis.

Bunds dropped for a sixth day as stocks rose around the world, reducing demand for safer assets. Spanish bonds gained and Italian securities erased losses as two officials said policy makers are reconsidering the role of the European Central Bank in insulating the two countries from market turmoil. Belgian bonds rose even as the nation paid the most in three years to sell six-month bills.

“Bunds are suffering as the market speculates that Germany is going to be on the hook to fund whatever solution the euro- region finance ministers come up with” for the crisis, said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “Risk assets appear to be well bid.”

Ten-year German yields rose four basis points, or 0.04 percentage point, to 2.34 percent at 4:30 p.m. London time after rising to 2.37 percent, the highest level since Aug. 9. The 2 percent bond due in January 2022 dropped 0.33, or 3.30 euros per 1,000-euro ($1,335) face amount, to 96.995.

Germany’s 30-year yield climbed five basis points to 2.94 percent after rising to 2.98 percent, surpassing the equivalent U.S. rate for this first time since May 2009. The 30-year Treasury yield has been an average 70 basis points above the German rate over the past year.

The Stoxx Europe 600 Index and the Standard & Poor’s 500 Index both gained 0.8 percent.

Brussels Meeting

Finance ministers meeting in Brussels today will discuss channeling ECB loans to cash-strapped euro nations through the International Monetary Fund, aiming to bring the central bank onto the front lines without violating its ban on direct lending to governments, said the officials, who declined to be identified because the talks were at an early stage.

Germany failed to get bids for 35 percent of the bunds it offered for sale on Nov. 23. The retained amount was the highest proportion of unsold 10-year debt since 1995, according to data compiled by Bloomberg, on concern Europe’s largest economy will have to fund increasing bailouts.

Spanish bonds gained for a second day, with 10-year yields falling 18 basis points to 6.39 percent. Ten-year Italian yields were little changed at 7.24 percent, erasing an increase of as much as 15 basis points.

Italian Auction

Italian bonds fell earlier as the nation sold 7.5 billion euros of debt at yields above the 7 percent level that forced Greece, Ireland and Portugal to seek bailouts. The Rome-based Treasury auctioned 2014 notes at 7.89 percent, 2020 debt at 7.28 percent and 2022 bonds at 7.56 percent.

“The problem is that Italy is issuing debt at just shy of 8 percent and if yields don’t come down in the medium term then obviously things could get pretty difficult,” said Huw Worthington, a fixed-income strategist at Barclays Capital in London. “Today’s auction itself was pretty good, it shows there’s demand out there.”

Italy’s 10-year yield has climbed more than one percentage point this month and about 2.5 percentage points this year amid concern the nation’s debt load -- bigger than that of Greece, Spain, Ireland and Portugal combined -- is unsustainable.

The ECB failed to fully offset the extra liquidity created by its bond purchases for the first time in seven months, a sign of mounting tensions among euro-area banks. While the central bank has failed to “sterilize” its bond program at least four times before, this is the first time it has happened since the ECB expanded the program to buy Italian and Spanish bonds.

ECB Buying

The ECB began buying Italian and Spanish debt on Aug. 8, according to traders who saw the transactions, as it sought to contain a surge in financing costs. After bond yields in the two countries fell to around 5 percent that week, they climbed above 6.5 percent this month amid speculation the nations won’t be able to repay their debts.

Belgium’s 10-year yields fell 28 basis points to 5.30 percent after declining 29 basis points yesterday. Two-year rates dropped 71 basis points to 3.85 percent.

The debt agency in Brussels said it sold 502 million euros of three-month bills at an average yield of 2.185 percent, compared with 1.575 percent at the prior auction on Nov. 15. Investors submitted bids for 5.61 times the amount on offer, up from 1.45 times two weeks ago. It also sold 513 million euros of six-month debt at 2.438 percent, versus 1.086 percent on Nov. 8.

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

German government bonds have returned 6.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds lost 11 percent.

--With assistance from Paul Dobson in London. Editors: Nicholas Reynolds, Matthew Brown

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

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


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