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Bunds Fall as Growth Signs Reduce Safety Bid; Italian Bonds Rise

February 02, 2012

Feb. 1 (Bloomberg) -- German bonds fell, with 10-year securities snapping a five-day advance, as optimism manufacturing is improving around the world sapped demand for Europe’s safest assets. Italian and Spanish bonds gained.

Ten-year German yields climbed from the lowest in two weeks as China said factory output unexpectedly expanded in January and an index of U.S. manufacturing rose. German bonds stayed lower as the nation sold 4.1 billion euros ($5.38 billion) of 10-year securities. Spanish bond yields dropped to the lowest level since November 2010 as stock gains spurred demand for riskier assets. Portuguese notes rose as borrowing costs declined at bill sales.

“There’s improved risk sentiment, peripheral yields have come in significantly with Italy leading the way,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. The stock rally added “to the risk-on move, weighing on core bonds,” he said.

Germany’s 10-year yield rose six basis points, or 0.06 percentage point, to 1.84 percent at 4:152 p.m. London time after falling to 1.78 percent yesterday, the lowest since Jan. 18. The 2 percent bond due January 2022 dropped 0.51, or 5.10 euros per 1,000-euro face amount, to 101.405.

China’s purchasing managers’ index rose to 50.5 last month from 50.3 in December, staying above the 50 level that indicates growth. Economists surveyed by Bloomberg News forecast 49.6. The Institute for Supply Management’s U.S. manufacturing index climbed to 54.1 in January from 53.1 in December, the group’s data showed today.

The Stoxx Europe 600 Index gained 1.9 percent, and the euro strengthened 0.9 percent to $1.3205.

German Sale

Germany sold the 10-year securities at an average yield of 1.82 percent, down from 1.93 percent at the previous auction on Jan. 4. Investors bid for 1.4 times the amount allotted, compared with 1.3 times at the January sale.

“Today’s tap saw significantly better demand,” John Davies, a fixed-income strategist at WestLB AG in London, wrote in an e-mail. “However, a bid-cover-ratio of 1.4 is still below the 1.5 average registered during 2011.”

Italy’s 10-year yield slid 28 basis points to 5.68 percent after falling to 5.66 percent, the least since Oct. 12. The spread over German bunds shrank to as low as 3.82 percentage points, the least since Dec. 8.

Spain’s 10-year yields fell 13 basis points to 4.84 percent, the lowest since Nov. 23, 2010. The two-year rate dropped 12 basis points to 2.49 percent, also reaching the least since November 2010.

ECB Loans

Spanish and Italian bonds have rallied since the European Central Bank offered unlimited three-year cash to the region’s financial institutions in December to avoid a credit crunch. The securities have advanced amid speculation banks are buying them to use as collateral with the ECB under the program, known as the longer-term refinancing operation. The central bank will offer another set of the loans this month.

“The LTRO can contain spreads for the periphery for many, many months to come,” Steven Major, global head of fixed-income research at HSBC Holdings in London, said in an interview on with Owen Thomas and David Tweed on Bloomberg Television’s “On the Move.” The refinancing operations meant a “large amount” of as much as 100 billion euros went into bonds that wouldn’t have otherwise, he said.

The ECB said today it will lend $9.4 billion over three months to euro-area banks. The ECB will also lend 10 banks $3.7 billion in its regular weekly dollar operation.

Regained Confidence

“Markets have regained some confidence,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit Global Research in Milan. “Investors are putting more emphasis on the upcoming ECB LTRO operations, where strong demand is expected and that will keep yields low.”

Italy can cut its ratio of debt to gross domestic product to below 100 percent in 2020 by meeting its target of eliminating the deficit in 2013, Deputy Finance Minister Vittorio Grilli said today in an interview in Rome.

Portugal’s notes gained for a second day as the nation sold 1.5 billion euros of bills.

The country auctioned securities due in July 2012 at an average yield of 4.463 percent, down from 4.74 percent at a previous auction of six-month bills on Jan. 18. Investors submitted bids for 2.6 times the amount allotted, compared with a bid-to-cover ratio of 3 in January.

The yield on the Portuguese note due in September 2013 fell 194 basis points to 18.60 percent, with the price rising to 82.74 percent of face value.

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

German bunds have returned 0.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portuguese bonds fell 14 percent, and Greek debt declined 0.7 percent.

--With assistance from Andrew Davis and Lorenzo Totaro in Rome Editors: Nicholas Reynolds, Paul Dobson

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at; Emma Charlton in London at

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

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