Bloomberg News

German Bonds Fall as China, India Manufacturing Boosts Optimism

January 03, 2012

Jan. 2 (Bloomberg) -- German government bonds fell, pushing the 10-year yield higher for the first time in five days, as European stocks gained and a Chinese manufacturing gauge rose in December, fueling optimism the global economy may stabilize.

The losses pushed the bund yield up from the lowest since Nov. 17 as India’s manufacturing grew at the fastest pace in six months. Germany’ economy, Europe’s largest, will improve during 2012 even as financial markets experience “considerable uncertainties,” Bundesbank President Jens Weidmann was quoted as saying in German newspaper Tagesspiegel. Spanish 10-year bonds were little changed after the government said last week the 2011 budget deficit would be higher than forecast.

“The move down in 10-year bund yields was, of course, in a very illiquid market and may have been a bit exaggerated,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “Asia is a stronghold for growth and we are grateful they kept us going last year. The crucial question is whether they will continue.”

The German 10-year yield increased seven basis points, or 0.07 percentage point, to 1.90 percent at 3:48 p.m. London time. The 2 percent bund due January 2022 fell 0.66, or 6.60 euros per 1,000-euro ($1,294) face amount, to 100.89. The yield dropped 13 basis points last week to 1.83 percent. The two-year rate was six basis points higher at 0.20 percent.

China, India Manufacturing

The Spanish 10-year yield was two basis points higher at 5.11 percent. The Italian 10-year yield fell 22 basis points to 6.89 percent, after rising for seven consecutive days.

China’s purchasing managers’ index was at 50.3 from 49 in November, the Beijing-based logistics federation said in a statement yesterday. The reading exceeded all forecasts in a Bloomberg News survey of 15 analysts, where the median estimate was 49.1. India’s PMI Index rose to 54.2 in December from 51 in November, HSBC Holdings Plc and Markit Economics said in a statement.

The Stoxx Europe 600 Index advanced for a third straight day, gaining 0.9 percent. It slid 11 percent in 2011, for its first annual drop since losing 46 percent in 2008.

Stocks stayed higher and bunds lower even as a Markit Economics report affirmed that European manufacturing output contracted for a fifth month in December.

The gauge, based on a survey of purchasing managers in the 17-nation euro region rose to 46.9 from 46.4 in November, the London-based research company said today. That was in line with an initial estimate published on Dec. 15. A reading below 50 indicates contraction.

French Bonds Decline

French bonds declined for a fourth day, leaving the yield on the 10-year security eight basis points higher at 3.23 percent. That left the extra yield, or spread, that investors get for holding the securities instead of similar maturity bunds at 133 basis points. The spread widened from 42 basis points a year ago, partly on concern that the country’s AAA rating would be threatened by potential losses at its banks amid the sovereign debt crisis.

Germany’s government declined to comment on a report that it may push for creditors to accept bigger losses on Greek debt than previously agreed upon, saying only that talks on lowering Greece’s debt level may end soon.

The country is studying a proposal to write down 75 percent of Greek government bonds held by private creditors as part of a planned debt swap to ensure greater debt sustainability, Greek news website Euro2day.gr reported today, without citing anyone.

2011 Returns

Germany is scheduled to sell 5 billion euros of additional 10-year bonds on Jan. 4. A sale of January 2022 securities on Nov. 23 generated bids covering just 65 percent of the debt issued, fueling concern that investors would desert even the region’s most credit-worthy nation.

The loss of confidence proved to be temporary and this week’s sale may be “reasonably successful,” Ulrich Wortberg, an analyst at Helaba Landesbank Hessen-Thueringen in Frankfurt, wrote in a client note today.

German bonds returned 9.7 percent in 2011, the most since the financial crisis of 2008, when they made 12 percent, indexes developed by Bank of America Merrill Lynch show. Italian debt declined 5.7 percent.

Gains by German bonds last year pushed the 10-year yield to a record low 1.636 percent in September as investors sought refuge from a sovereign debt crisis that forced Greece, Ireland and Portugal to seek bailouts. Italian yields climbed to a euro- era high of 7.48 percent in November as the crisis threatened to infect the euro area’s third-biggest economy.

Spain’s budget deficit for 2011 may exceed 8 percent of gross domestic product, Economy Minister Luis de Guindos said in an interview with Cadena SER radio today. Prime Minister Mariano Rajoy announced 14.9 billion euros of spending cuts and tax increases on Dec. 30. Spain’s previous government had targeted a deficit of 6 percent.

Volatility on Italian sovereign debt was the second highest in euro-area markets today, followed by Belgium, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. Austria was the highest, the data show.

--With assistance from Unni Krishnan in New Delhi and Rainer Buergin in Berlin. Editors: Daniel Tilles, Mark McCord

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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


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