Bloomberg News

Germany’s Note Yields Fall Most in Two Months After Retail Sales Decline

March 02, 2012

Germany’s bonds rose, pushing down two-year yields by the most in two months, as an unexpected decline in the nation’s retail sales stoked concern the debt crisis is weighing on the region’s recovery.

Spanish notes fell for the first time in 12 days after Prime Minister Mariano Rajoy said a deepening economic slump will hamper efforts to rein in the budget deficit. Italian 10- year bonds posted the longest run of weekly gains in 14 years after the budget shortfall narrowed more than economists forecast. Italy’s bonds also gained on speculation banks were using some of the three-year loans offered this week by the European Central Bank to buy the securities.

“There is still some concern about softness in the euro- region economy and as long as there is uncertainty about this, that keeps German yields anchored,” said Rasmus Rousing, a fixed-income strategist at Credit Suisse Group AG in Zurich. The ECB’s refinancing operations “helped peripheral bonds a lot but there are still risks out there,” he said.

Germany’s two-year yield dropped five basis points, or 0.05 percentage point, to 0.16 percent at 4:41 p.m. London time after dropping as much as six basis points, the most since Dec. 27. The 0.25 percent note due in March 2014 gained 0.105, or 1.05 euros per 1,000-euro ($1,326) face amount, to 100.175. The 10- year yield fell seven basis points to 1.80 percent.

German retail sales declined 1.6 percent in January from December, when they increased 0.1 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a gain of 0.5 percent, a Bloomberg News survey showed.

Bunds Gain

German bonds have returned 11 percent in the past year as the region’s debt crisis worsened, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek bonds tumbled 66 percent, and Portuguese debt dropped 20 percent.

Spanish bonds pared a weekly gain as Rajoy defied European Union allies by raising his nation’s budget-deficit target for this year to 5.8 percent of gross domestic product compared with the previously agreed 4.4 percent. The government also announced the economy will contract 1.7 percent this year with the jobless rate staying above 24 percent.

The yield on the country’s 10-year bond rose four basis points to 4.90 percent. That increased the extra yield on the securities over comparable German debt by 10 basis points to 312 basis points. Spain’s borrowing costs for 10 years exceeded Italy’s for the first time since August 2011.

Italy’s Deficit

Italy’s 10-year bonds rose for a sixth day as the national statistics office said the budget deficit shrank to 3.9 percent of GDP last year from 4.6 percent in 2010. Economists surveyed by Bloomberg forecast a decline to 4 percent. Economic growth last year slowed to 0.4 percent, topping a 0.3 percent forecast, from 1.8 percent in 2010.

The Italian 10-year yield dropped five basis points to 4.90 percent, increasing this week’s decline to 58 basis points. Two- year yields fell two basis points to 1.74 percent.

Italian and Spanish debt has risen since December amid speculation investors are using loans from the ECB to buy the securities. The Frankfurt-based central bank said on Feb. 29 it would lend banks 529.5 billion euros under its second longer- term refinancing operation.

Nordea Investment Management, a unit of the Nordic region’s largest bank, has cut its holdings of Italian bonds in the past month amid concern the global economic recovery may be derailed by higher oil prices.

‘Big Risk’

The company bought shorter-maturity Italian notes last year, favoring them over Spanish debt because of their greater liquidity and higher yields, said Martti Forsberg, who oversees about 2.5 billion euros. He said he is underweight the longer- dated securities of both countries, meaning his funds own a smaller percentage of the debt than the indexes against which they measure their performance.

“Anything that can hurt the global economy, including an oil shock would be a big risk,” Helsinki-based Forsberg said in a Feb. 24 interview.

Armstrong Investment Managers said it sold its remaining Italian securities, making a 25 percent return after the ECB’s liquidity operations. The company, which bought the securities in November, cut its holdings to zero from about 3 percent to 4 percent, said Patrick Armstrong, managing partner in London. The company oversees about $353 million.

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

The yield on Greece’s bonds due October 2022 climbed 66 basis points to 37.10 percent, pushing the price down to 18.63 percent of face value.

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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