Bloomberg News

German Bonds Rise on Global Slowdown Signs as Greek Debt Slides

March 23, 2012

German bonds advanced for a fourth day as signs that global growth is slowing boosted demand for the euro area’s safest assets. Greek securities slid on the last day investors can participate in the nation’s debt swap.

Ten-year German bunds headed for the biggest weekly gain this year as a measure of China’s leading indicators slowed and the nation’s third-biggest bank said profit slid. Italian bonds were also set for their biggest weekly drop in 2012 as data showing European manufacturing shrank sapped demand for higher- yielding assets. Bunds outperformed Treasuries in the five days, with the 10-year yield gap widening to the most in about a year.

“Since the start of the week we have seen quite a pronounced climate of risk aversion, which has triggered the move in bunds,” said Michael Leister, a fixed-income strategist at DZ Bank AG in Frankfurt. “The news from China is not very constructive for risk assets.”

The yield on the German 10-year bond, the region’s benchmark government security, fell four basis points, or 0.04 percentage point, to 1.87 percent at 4:35 p.m. London time, leaving the rate 18 basis points lower in the week. The 2 percent security due January 2022 rose 0.385, or 3.85 euros per 1,000-euro ($1,326) face amount, to 101.160. The five-day drop in the yield was the most since the week ended Dec. 16.

Agricultural Bank of China Ltd. (601288) said net income fell 14 percent in the fourth quarter. A gauge of China’s leading indicators rose 0.8 percent in February, slowing from a revised 1.5 percent advance in January, the Conference Board said today in Beijing.

Bunds Outperform

German bonds have returned 11 percent over the past year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds rose 4.5 percent, while Italian securities increased 4.4 percent.

The Italian 10-year yield fell five basis points to 5.05 percent today, for a weekly increase of 19 basis points, the most since the 5-day period ending Dec. 23. Spain’s 10-year yield dropped 12 basis points to 5.37 percent, paring its weekly advance to 18 basis points.

A euro-area composite index based on a survey of purchasing managers in services and manufacturing fell to 48.7 in March from 49.3 in February, London-based Markit Economics said yesterday. A reading below 50 indicates contraction.

Greek Bonds

Investors holding bonds governed by laws other than those of Greece have until 10 p.m. Athens time today to decide whether to participate in the nation’s plan to obtain a reduction of more than 50 percent on its obligations to private investors. The country has already used so-called collective-action clauses to compel all investors in the nation’s domestic-law debt to take part in its swap.

The yield on the 2 percent Greek bond maturing in February 2023 climbed to more than 20 percent for the first time since the nation issued the securities on March 12 as part of its debt exchange.

The yield climbed 96 basis points to 20.10 percent, with the price falling to 24.90 percent of face value. The 30-year yield jumped 137 basis points to 18.02 percent, surging 3.02 percentage points in the past five days, with the price tumbling to 16.85 cents on the euro.

Bondholders planning to resist Greece’s debt swap are unlikely to get paid in full, according to Fidelity Investments and JPMorgan Chase & Co.

Debt Deadline

“I struggle to imagine a situation where holdouts get paid at par,” said Nick Eisinger, a sovereign analyst in London at Fidelity Investments, the second-largest U.S. mutual fund company. “It’s hard to imagine a scenario in which Greece capitulates, because of the political message that sends and also, they just don’t have the money.”

Investors holding bonds governed by laws other than those of Greece have until 10 p.m. Athens time today to decide whether to participate in the nation’s plan to obtain a reduction of more than 50 percent on its obligations to private investors. Evangelos Venizelos said on March 9, when he was the nation’s Finance Minister, that sweeteners offered in the debt exchange wouldn’t be available after today’s deadline.

The extra yield investors demand to hold 10-year Treasuries instead of similar-maturity German bunds increased to the most in 13 months. The spread reached as much as 39 basis points today, the most since Feb. 21, 2011, based on closing prices.

German government securities may keep outperforming their U.S. peers, UBS AG said, citing trading patterns.

Technical Levels

“A close above 31 basis points, the 50 percent retracement of the move between March 2010 and November 2011, opens the way for an extension toward 67 basis points,” Richard Adcock, head of fixed-income technical strategy at UBS in London, wrote in a research note today. That level represents “the January 2010 extreme,” he said.

“Any short-term pullback to 32 basis points should be seen as an opportunity to position for further bund outperformance,” Adcock said.

The difference in yield between Italian 10-year bonds and similar-maturity German bunds widened two basis points to 320 basis points after reaching 334 basis points, the most since March 7.

The French-German 10-year yield spread expanded as much as five basis points to 113 basis points, the most since March 13. The Belgian-German 10-year gap widened four basis points to 150 basis points.

The Dutch-German spread increased two basis points to 59 basis points after reaching 61 basis points on March 22, the widest since Nov. 23.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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