German bunds fell, driving yields to their biggest weekly increase since November, as Federal Reserve policy makers raised their assessment of the U.S. economy, damping demand for the euro-region’s safest assets.
German 10-year yields climbed to the highest in three months as Italian and Spanish borrowing costs fell at bond auctions. The Fed raised its economic outlook on March 13, while data two days later showed claims for jobless benefits in the U.S. dropped to match a four-year low. The yield on Spain’s 10- year bond rose for a second week as finance ministers prodded the nation to make deeper budget cuts.
Safer assets such as bunds “have underperformed over the past week, driven by a combination of improvements in underlying U.S. economic data, more upbeat commentary by the Fed, and continued positive auction results in Spain and Italy,” said Brian Barry, a strategist at Investec Bank Plc in London. “Concerns over the outlook for the periphery still remain however, as evidenced by the Spanish 10-year yield trending higher over the last week.”
German 10-year yields rose 26 basis points, or 0.26 percentage point, to 2.05 percent at 4:23 p.m. London time yesterday, the biggest increase since the five-day period ending Nov. 25. The rate climbed to 2.07 percent, the highest since Dec. 13. The 2 percent bond due January 2022 lost 2.295, or 22.95 euros per 1,000-euro face amount, to 99.535.
Two-year (GDBR2) yields climbed 17 basis points this week to 0.33 percent.
Yields Near Lows
Bund yields remained about 40 basis points from their record low even after Greece won a second bailout and Italian rates dropped after the second round of ECB longer-term refinancing operation loans.
That “seemed incongruous with the ‘good news’ of the Greek restructuring and the second three-year LTRO,” Jamie Searle, a fixed-income strategist at Citigroup Inc. in London, wrote in a client note yesterday. “In the end, it has taken events in the U.S. to take 10-year bund yields higher.”
Spanish bonds fell even after borrowing costs slid at an auction. European finance chiefs meeting in Brussels early in the week called on Spain to prune an additional 0.5 percent of gross domestic product out of its 2012 budget. Prime Minister Mariano Rajoy on March 2 unilaterally raised the country’s 2012 deficit target to 5.8 percent.
Spanish, Italian Sales
Spain sold 976 million euros of 3.25 percent notes due April 2016 at an average yield of 3.37 percent, compared with 3.75 percent when the notes were sold in January.
Italy’s three-year borrowing costs fell to a 17-month low March 14 as the nation sold 5 billion euros of 2.5 percent notes due March 2015 at an average yield of 2.76 percent, the lowest since October 2010.
Spain’s 10-year (GSPG10YR) yield climbed 20 basis points this week to 5.20 percent. The yield on similar maturity Italian debt rose three basis points to 4.86 percent.
The European Financial Stability Facility bailout fund plans to sell as much as 1.5 billion euros of debt maturing in between 20 and 30 years on March 19 and 3 billion euros or more in benchmark five-year notes on March 22, Klaus Regling, chief executive officer of the 440 billion-euro fund said yesterday.
Greece plans to sell 1 billion euros of 91-day treasury bills on March 20, while Portugal is scheduled to auction 119- and 364-day bills on March 21.
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