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German Bonds Rise as Demand Climbs at Auction; French Debt Gains

January 11, 2012

Jan. 11 (Bloomberg) -- German bonds rose, with five-year yields falling to within one basis point of a record, as investors seeking a haven from the debt crisis submitted bids for twice the maximum amount at an auction of the securities.

French bonds gained as Finance Minister Francois Baroin denied having been notified by a ratings company about a downgrade of the nation’s AAA credit rating. Spanish notes advanced as lawmakers approved Prime Minister Mariano Rajoy’s first austerity measures. German notes extended gains after Fitch Ratings said the European Central Bank should step up bond purchases to combat the euro-region’s crisis.

“The yields are very low but a lot of investors need to keep some AAA rating in their portfolio,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. “The better environment remains relatively fragile and still exposed to disappointment.”

Germany’s five-year yield fell nine basis points, or 0.09 percentage point, to 0.74 percent at 5 p.m. London time. The 1.25 percent note due in October 2016 rose 0.395, or 3.95 euros per 1,000-euro ($1,270) face amount, to 102.355. The yield slid to 0.739 percent on Dec. 30, the lowest since Bloomberg began tracking the data in 1990.

The two-year yield declined three basis points to 0.14 percent after falling to an all-time low 0.134 percent.

Germany received bids for 8.97 billion euros of the five- year notes on auction today, above the Bundesbank’s maximum sales target of 4 billion euros. The 0.75 percent notes due in February 2017 were sold at an average yield of 0.90 percent.

‘Volatile’ Markets

The auction reflects “volatile, uncertain” markets, the German debt agency said in a statement. AAA rated Switzerland sold 150 million francs ($157 million) of bonds maturing in June 2027 at an average yield of 1.096 percent, attracting bids equivalent to 1.27 times the amount allotted, central bank data showed today.

Germany’s offering “received a warm welcome negating fears that yields near record lows would dampen interest,” John Davies, a fixed-income strategist at WestLB AG in London, wrote in a note to clients. “Bunds in general are reacting positively to the auction result given lingering concerns in the wake of some very weak demand for German paper in the primary market towards the end of last year.”

‘Credible Buyer’

The ECB needs to be more actively engaged to solve the debt crisis, said David Riley, head of sovereign ratings at Fitch.

“We need to have a credible buyer put in place and we don’t have that at the moment,” which is “why we have a number of sovereigns under review,” Riley said at a conference in Frankfurt. “The crisis won’t be over until we have a broad- based economic recovery.”

The 10-year French yield fell nine basis points to 3.16 percent. The extra yield offered over similar-maturity German bunds narrowed two basis points to 134 basis points.

The euro weakened as much as 0.9 percent to $1.2662 amid speculation France’s credit rating may be cut.

Asked by telephone to comment on whether he had been warned by either Moody’s Investors Service or Standard & Poor’s about a potential downgrade, Baroin wrote: “False.”

Spain’s Parliament approved the government’s austerity measures, with 197 of the assembly’s 350 lawmakers voting for the decree, said Parliament Speaker Jesus Posada. Rajoy’s government, which came to power after November’s elections, said the measures became necessary when it learned the budget deficit would be in a third larger than forecast in 2011.

Spanish two-year yields dropped 32 basis points to 3.10 percent after declining to 3.02 percent, the lowest level since April 6. The nation will tomorrow sell as much as 5 billion euros of debt due in 2015 and 2016.

‘Surprisingly Good’

There’s been “some surprisingly good demand for Spanish debt close to tomorrow’s auction, and some of that is still feeding through,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. Demand for shorter-dated debt “has been very good.”

Italian debt rose as Prime Minister Mario Monti met with German Chancellor Angela Merkel to discuss the debt crisis.

Two-year Italian yields dropped 27 basis points to 4.71 percent, and 10-year rates fell 13 basis points to 6.99 percent.

German Growth

German notes also gained after a government report showed economic growth slowed in 2011, boosting demand for the relative safety of government debt.

Gross domestic product expanded by 3 percent last year, from 3.7 percent in 2010, the Federal Statistics Office said. The economy shrank “roughly” 0.25 percent in the fourth quarter from the third, the statistics office in Wiesbaden said in an unofficial estimate.

“The global economy is clearly losing momentum and that’s taking its toll on Germany,” said Nick Stamenkovic, a fixed- income strategist in Edinburgh at RIA Capital Markets, a broker for banks and investors. There’s also “a huge amount of issuance to come for Italy and Spain this quarter and investors are nervous about how that’s going to be taken. Bunds will remain well underpinned near term.”

German bonds have lost 0.3 percent this year, after gaining 9.7 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

--With assistance from Helene Fouquet in Paris, Angeline Benoit in Madrid, Emma Charlton and David Goodman in London, and Rainer Buergin in Berlin. Editors: Nicholas Reynolds, Paul Dobson

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at; Lucy Meakin in London at

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

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