Investors are returning to German bunds as signs that global economic growth is slowing reignite demand for the euro region’s safest securities.
Ten-year German bonds last week posted their biggest five- day gain this year, pushing yields down from a four-month high, as reports showed manufacturing in Europe contracted and China’s economy is losing momentum amid a decline in exports. Spanish 10-year bonds have dropped for nine of the past 10 days, while Italy’s benchmark yield climbed to the highest this month. Greek bonds tumbled as traders increased bets that the nation will need a third bailout.
“Early last week I switched almost all my Italian and Spanish exposure back into bunds,” said Michael Riddell, a fund manager at M&G Investments in London, which oversees about $323 billion. “Bunds will continue to benefit from a flight to safety.”
The 10-year bund yield fell 18 basis points last week to 1.87 percent, the biggest decline since Dec. 16. The 2 percent bund due January 2020 gained 1.625, or 16.25 euros per 1,000- euro ($1,324) face amount, to 101.175. The yield had risen to 2.07 percent on March 21, the highest level since Dec. 13. The rate was little changed at 1.87 percent at 8:52 a.m London time.
Bunds rallied after Markit Economics said on March 22 its index of services and manufacturing fell to 48.7 in March from 49.3 the previous month. A preliminary index of China manufacturing from HSBC Holdings Plc and Markit dropped to 48.1 from 49.6, the London-based survey provider said the same day.
“There are renewed worries about the periphery based on the macro-economic data out of Europe and some worries about China,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “If you do want to buy Europe, you’re channeled back towards bunds.”
Spanish 10-year (GSPG10YR) yields climbed 19 basis points last week to 5.39 percent, extending their advance to 25 basis points since European finance chiefs met in Brussels on March 13 and called on the nation to make further cuts to its 2012 budget.
The rate slipped six basis points to 5.31 percent today.
“Spain is the key country about which I’m most worried,” Citigroup Inc. chief economist Willem Buiter said in an interview with Tom Keene and Ken Prewitt on Bloomberg Radio on March 21. It has “moved to wrong side of spectrum,” he said.
The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity bunds widened 36 basis points last week to 351. It was at 345 basis points today.
“Bunds are continuing to benefit from a safe-haven status,” said Alex Johnson, the London-based head of portfolio management at Fischer Francis Trees & Watts, which has $54 billion in assets. “We’re seeing an underperformance in the periphery, particularly with respect to Spain. It’s related, to a certain degree, to ongoing fears about China, and the extent to which it’s experiencing a slowdown.”
Bunds slid earlier this month as optimism the sovereign- debt crisis is being contained sapped the allure of haven assets. Benchmark yields jumped 26 basis points in the five days ended March 16 as Federal Reserve policy makers raised their assessment of the U.S. economic outlook.
The move prompted UBS AG analysts, including chief economist Larry Hatheway, to write in a March 16 report that “the secular bear market in bonds has begun.”
The yield difference, or spread, between bunds and similar- maturity Treasuries widened to the most since February 2011 as German assets were supported amid the U.S. note’s longest losing streak since 2006.
The benchmark bund-Treasury spread reached 38.3 basis points today, the most since Feb. 21, 2011, according to data compiled by Bloomberg based on closing prices.
Germany “is still in for a long period of low yields,” said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. “If bund yields move above 2 percent, they are going to attract buyers.”
The nation’s 10-year bonds returned 9.7 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, as investors sought safety amid the euro region’s sovereign debt crisis. Yields slid 141 basis points in the period.
Bunds have about 0.1 percent this year, the indexes show, even after the European Central Bank boosted bank liquidity with almost 1 trillion euros of exceptional three-year loans and as Greece’s debt restructure paved the way for a second bailout for the indebted nation.
“The market is already betting heavily on the next Greece default” Riddell said. “Investors need to realize that the massive rally in peripheral sovereign debt, and probably risky assets generally, is mostly to do with the ECB’s massive liquidity injection. The sad reality is that liquidity is no substitute for solvency.”
Rates on bonds from Europe’s so-called periphery indicate investors are still concerned the crisis will spread.
Portugal’s 10-year (GSPT10YR) yields have climbed to 12.60 percent from a 2012 low of 11.90 on Feb. 13, while the rate on Greek securities maturing in February 2023 is 20.64 percent, up from 18.45 percent on March 12 when the debt deal was struck.
Europe’s debt crisis “is certainly not over,” Andrew Bosomworth, Pacific Investment Management Co.’s Munich-based head of portfolio management said at the Bloomberg Sovereign Debt Conference hosted by Bloomberg Link in Frankfurt on March 22. “The status quo is not working and it has got to be fixed.”
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