German bunds rose, pushing yields toward a two-week low, on speculation measures to increase the euro-area’s financial firewall will fail to stem the region’s sovereign-debt crisis.
Most euro-area government bonds underperformed German securities as finance ministers from the 17 euro nations prepared to meet in Copenhagen on March 30 to discuss bailout provisions. Italian bonds declined as the nation sold 3.82 billion euros ($5.09 billion) of debt. Portugal’s two-year notes advanced, pushing yields below 10 percent for the first time since April.
“It’s far from certain that we will have an increase in the rescue funds’ capacity and also the devil will be very much in the detail,” said Elwin de Groot, a market economist at Rabobank Nederland in Utrecht. “Overall consumers remain fairly downbeat” and that is boosting demand for safety.
The German 10-year yield fell seven basis points, or 0.07 percentage point, to 1.89 percent at 5 p.m. London time after dropping to 1.855 percent on March 23, the lowest since March 13. The 2 percent bond due January 2022 rose 0.575, or 5.75 euros per 1,000-euro face amount, to 100.975.
Spain’s economy is suffering its second recession since 2009, the country’s central bank said in a monthly bulletin today, obstructing the government’s efforts to reorder public finances as it prepares the budget for this year.
German Chancellor Angela Merkel yesterday cited “fragility” in Spain and Portugal as she said Germany may allow the region’s two bailout facilities to run in tandem without expanding the size of a permanent rescue fund to more than 500 billion euros.
Merkel told lawmakers today that she expects German borrowing costs to rise as the debt crisis ebbs and the country’s status as a haven wanes, according to two party officials who took part in a meeting in Berlin.
Italian 10-year yields climbed nine basis points to 5.12 percent, increasing the extra yield investors demand to hold the securities over bunds by 15 basis points to 323 basis points.
The Spanish 10-year yield rose two basis points to 5.35 percent. The spread over bunds expanded eight basis points to 346 basis points.
Italy sold 2.82 billion euros of two-year zero-coupon bonds at a rate of 2.352 percent. The country also auctioned a combined 1 billion euros of inflation-linked bonds due in 2019 and 2021. The total raised was less than the maximum target of 4 billion euros.
Spain sold 2.58 billion euros of three- and six-month bills compared with its maximum target of 3 billion euros.
Portugal’s two-year notes gained for a ninth day, with the yield dropping 106 basis points to 9.5 percent. The 10-year (GSPT10YR) yield fell 77 basis points to 11.45 percent, the lowest level since Nov. 24.
“Portuguese debt is trading at very pessimistic levels and last week there were some decent buying flows, indicating that investors are still building positions,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “This looks like a continuation of the good price action.”
Volatility on Portuguese bonds was the highest in euro-area markets followed by Ireland, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.
Irish notes rose after the country’s Prime Minister Enda Kenny said an agreement between the debt agency and a subsidiary of China’s sovereign wealth fund to explore investment opportunities in Ireland shows the nation “is heading in the right direction.” Two-year note yields fell eight basis points to 4.65 percent.
Ten-year German bunds advanced for the fifth time in six days after GfK SE (GFK) predicted German consumer confidence will decline for the first time in seven months in April. The market research company said its consumer-sentiment index, based on a survey of about 2,000 people, will slip to 5.9 from a 12-month high of 6 in March.
The additional yield investors demand to hold U.S. 10-year debt over German bunds widened to 32 basis points today, triggering a “recommendation to position for trend extension,” Richard Adcock, a currency and fixed-income technical strategist at UBS AG in London, wrote in a note to clients.
Investors should target a widening to 44 basis points, which is “just above the 62 percent retracement of the March 2010-to-November 2011 move,” he wrote, citing Fibonacci analysis. They should exit the position if the spread narrows to 24 basis points, he said.
Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low.
German bunds have declined 0.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds made the biggest return of the 26 markets tracked by the indexes, gaining 12 percent, followed by Irish securities, which rose 11 percent.
-- With assistance from Kati Pohjanpalo in Helsinki. Editors: Paul Dobson, Mark McCord
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