Bloomberg News

Bunds Fall as Bernanke Sees Improvement Signs; French Bonds Rise

February 02, 2012

Feb. 2 (Bloomberg) -- Germany’s two-year notes fell for a second day after U.S. Federal Reserve Chairman Ben S. Bernanke said the economy has shown signs of improvement, damping demand for the safest securities.

French bonds gained after borrowing costs declined at a sale of benchmark 10-year debt, shrinking the extra yield that investors demand for holding the nation’s 10-year debt instead of bunds to the narrowest since December. Spanish 10-year bonds fell for the first time in three days as the nation sold 4.56 billion euros ($6 billion) of notes.

“Bernanke came across as more balanced than before,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “There’s still a favorable environment for risky products, which means people are going to switch out of bunds.”

Germany’s two-year yield rose three basis point, or 0.03 percentage point, to 0.21 percent at 5 p.m. in London after climbing two basis points yesterday. The 0.25 percent note maturing in December 2013 fell 0.05, or 50 euro cents per 1,000- euro face amount, to 101.08.

“Over the past few months, indicators of spending, production, and job-market activity have shown some signs of improvement,” Bernanke said, according to prepared testimony to the House Budget Committee in Washington. “The outlook remains uncertain, however, and close monitoring of economic developments will remain necessary.”

French Bonds

The French 10-year yield fell 13 basis points to 2.9 percent, narrowing the spread over benchmark German yields by 13 basis points to 1.05 percentage points. The gap earlier contracted to 1.04 percentage points, the least since Dec. 28.

France sold 5.698 billion euros of 10-year bonds at an average yield of 3.13 percent, compared with 3.29 percent at the previous auction of the maturity on Jan. 5.

It was “a solid auction that suggests diminishing worries about France as a name as well as a good underpinning for core bonds in general,” Luca Jellinek, head of European interest- rate strategy at Credit Agricole Corporate & Investment Bank in London, wrote in an e-mailed note.

Bunds rose earlier after a European report showed producer- price inflation slowed in December, adding to signs the region’s growth is cooling.

Producer prices in the 17-nation euro region rose 4.3 percent from a year earlier after increasing a revised 5.4 percent in November, the European Union’s statistics office in Luxembourg said.

Spanish Sale

Spanish bonds dropped as the nation sold 4.56 billion euros of notes due in 2015, 2016 and 2017, just surpassing the maximum target of 4.5 billion euros set for the auctions. That compares with a 6.61 billion euro sale on Jan. 19, which far exceeded the 4.5 billion euros target.

“Spain doesn’t seem to be that much of a hit,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “They have done most of their supply at the shorter-dated paper because that’s where the ECB is supporting the market. It would have been much better if they had been able to sell more of the longer-dated bonds, that would give them more time before they had to roll it over.”

Spain’s 10-year yields climbed eight basis points to 4.93 percent after dropping to 4.84 percent yesterday, the lowest since November 2010.

German bunds are little changed this year, after returning 9.8 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities have gained 3 percent in 2012, and Italian bonds jumped 7.4 percent, the indexes show.

--Editors: Mark McCord, Nicholas Reynolds

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