Bloomberg News

German Debt Yields Fall to Records as Spanish Bonds Drop

May 02, 2012

A visitor walks past the German national flag inside the dome of the Reichstag, Germany's parliament building, in Berlin. Photographer: Michele Tantussi/Bloomberg

A visitor walks past the German national flag inside the dome of the Reichstag, Germany's parliament building, in Berlin. Photographer: Michele Tantussi/Bloomberg

Germany’s bonds rose, driving the nation’s borrowing costs to record lows, on speculation Europe’s economic slump is deepening and exacerbating the region’s financial crisis.

Yields on German two-, five-, 10- and 30-year securities fell to lowest since Bloomberg began tracking the securities after unemployment in the euro area rose in March and manufacturing shrank for a ninth month in April, stoking demand for the safest assets. Spanish and Italian 10-year bonds fell as the region’s debt markets reopened after a holiday yesterday. Portugal’s notes gained as the nation auctioned 1.5 billion euros ($1.97 billion) of bills.

“Bunds have been trading at low levels for a while and all they required was the miserable Purchasing Managers’ Index numbers to take them to fresh lows,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London, referring to yields. “For those investors that have to have a proportion of their portfolios invested in euros, there are few other options.”

The 10-year bund yield fell five basis points, or 0.05 percentage point, to 1.61 percent at 4:46 p.m. London after dropping to a record 1.599 percent. The 1.75 percent security due in July 2022 rose 0.465, or 4.65 euros per 1,000-euro face amount, to 101.265.

Two-year yields dropped to as low as 0.066 percent, five- year rates reached 0.549 percent and 30-year yields slid to 2.325 percent. Bund futures climbed to an all-time high of 141.839. Finland’s 10-year bond yield also dropped to 1.998 percent, the least on record.

Factory Output

The euro-area factory gauge based on a survey of purchasing managers slipped to 45.9 from 47.7 in March, London-based Markit Economics said. That’s the lowest in 34 months and compares with an estimate of 46 published on April 23. A reading below 50 indicates contraction. An Italian manufacturing index tumbled to 43.8 from 47.9. German, Spanish and French factory indexes also showed a contraction.

“The sharp fall in Italian PMI and continued downward trend in Spanish, French and German PMI is the main driver of the selloff in Spanish debt,” said Brian Barry, an analyst at Investec Bank Plc in London. That underscores “the fragility of the underlying fundamentals,” he said.

Spain’s 10-year yield rose eight basis points to 5.85 percent and similar-maturity Italian yields climbed one basis point to 5.55 percent.

Volatility on Spanish bonds was the highest in euro-area markets today followed by Swedish securities, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. The change in the Spanish spread was 3.5 times the 90-day average.

Unemployment Rises

Italy’s unemployment rate jumped more than economists forecast in March to the highest since 2000. Joblessness increased to a seasonally adjusted 9.8 percent from a revised 9.6 percent in February. The rate for the 17-nation euro area climbed to 10.9 percent from 10.8 percent.

German unemployment unexpectedly rose in April, with the number of people out of work increasing a seasonally adjusted 19,000 to 2.87 million, the Nuremberg-based Federal Labor Agency said today.

European stocks dropped and the euro weakened for a third day against the dollar.

The European Central Bank meets tomorrow in Barcelona to review monetary policy, with all 58 economists in a Bloomberg News survey predicting it will keep the benchmark interest rate unchanged at a record-low 1 percent.

Portuguese Notes

Portugal’s notes gained as the nation sold six- and 12- month bills. The two-year yield declined 34 basis points to 8.24 percent after falling to 8.22 percent, the lowest level since March 2011.

The 10-year bond yield fell four basis points to 10.59 percent. The extra yield investors demand to hold the securities instead of similar-maturity German bunds still increased four basis points to 898 basis points.

“The crisis certainly added, temporarily, to the demand for bunds and has strengthened the nature of German credit,” said Carl Heinz Daube, managing director of Germany’s Federal Finance Agency in Frankfurt.

Too Wide

The spread of Portuguese bonds over bunds is too wide because it implies investors will have to write down almost half of their holdings, according to ING Bank NV.

The difference should be around 600 basis points, implying a 30 percent writedown, Alessandro Giansanti, a senior rates strategist at ING in Amsterdam, said today by telephone.

Greece’s debt rating was lifted out of the default category by Standard & Poor’s after the country completed the largest debt restructuring in history. The long-term sovereign rating was raised to CCC from SD, or selective default, with a stable outlook, the ratings company said today.

The Greek 10-year yield rose 26 basis points to 20.43 percent. It surged to a record 44.21 percent on March 9 before the debt exchange.

German debt returned 1.1 percent last month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities were the worst performers in April of the 26 sovereign markets tracked by the indexes, falling 1.8 percent.

To contact the reporters on this story: Lucy Meakin in London at; David Goodman in London at

To contact the editor responsible for this story: Daniel Tilles at

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