Bloomberg News

Bund Yields Climb From Record Lows Before G-8

May 18, 2012

German 10-year bunds fell, pushing yields up from a record low, as investors bet price gains were overdone before Group-of-Eight leaders meet to discuss ways to counter Europe’s financial woes.

Spanish and Italian bonds advanced as German Finance Minister Wolfgang Schaeuble said it was important for Europeans to form a common position on the debt crisis as quickly as possible. Yields on two-, five-, and 30-year German securities earlier fell to all-time lows after Moody’s Investors Service lowered the credit ratings of 16 Spanish banks, spurring demand for Europe’s safest government debt. Separately, Greece’s credit grade was lowered one level by Fitch Ratings.

“In the absence of further negative impulses, markets appeared to experience a modest bout of profit-taking,” Sercan Eraslan, a fixed-income strategist at WestLB AG in Dusseldorf, Germany, wrote in a note to clients. Investors will “wait to see what the weekend news flow will bring,” he wrote.

The German 10-year yield climbed two basis points, or 0.02 percentage point, to 1.43 percent at 4:02 p.m. London time, after falling to 1.396 percent, the lowest since Bloomberg began tracking the data in 1989. The rate has declined eight basis points since May 11. The 1.75 percent bond due July 2022 fell 0.18, or 1.80 euros per 1,000-euro ($1,271) face amount, to 102.97.

The two-year note yield slid to 0.031 percent, while the five-year rate dropped to 0.463 percent, also records. The 30- year bund yield slumped to an all-time low of 2.046 percent.

Technical Indicators

Ten-year bund futures fell from a record after a technical indicator used by traders showed the securities were poised to change direction. The contract expiring in June weakened 0.3 percent to 143.56, after reaching 144.06.

The 14-day relative-strength index for the contract climbed to 77.6 yesterday. It has remained above the level of 70 since May 8, a signal that the price may be set to fall.

German Chancellor Angela Merkel and fellow European leaders will again face pressure from their G-8 counterparts to do more to quell the crisis after speculation that Greece will exit the euro wiped about $4 trillion from global equity markets this month. The U.S., which hosts the summit for leaders of the G-8 nations beginning today, still faces economic challenges from the “damaging” situation in Europe, Treasury Secretary Timothy F. Geithner said yesterday.

“In recent years we haven’t been quick enough” at reaching a common position, Schaeuble said in the interview broadcast today on France’s Europe 1 radio.

Budget Strains

Spain’s 10-year bond yield dropped six basis points to 6.25 percent after rising as high as 6.38 percent. It was at 6.01 percent on May 11. Similar-maturity Italian yields declined four basis points to 5.78 percent. They earlier climbed to 5.91 percent.

Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA) were among lenders cut by Moody’s, which cited economic weakness and Spain’s budget strains.

“We saw a classic flight to quality after the bank downgrades,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “They were more aggressive than expected, and the ratings agencies will be looking at the banking systems of other euro-zone countries.”

The cost of insuring Spanish government debt against default rose to a record high. Credit-default swaps on Spain rose as much as nine basis points to 560.

Irish Volatility

Fitch cut Greece’s long-term credit rating to CCC from B-, citing heightened risk that the nation may not be able to sustain membership of the monetary union.

Volatility on Ireland’s bonds was the highest in euro-area markets followed by Portugal, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Irish two-year notes slipped for an 11th day, pushing the yield 17 basis points higher to 6.98 percent. The rate reached 7.37 percent, the most since Jan. 12. Irish government securities have declined amid speculation voters will reject a referendum this month that would enshrine planned European fiscal rules in national law.

Longer-maturity German bonds have outperformed shorter- dated notes this week with the difference in two- and 10-year yields shrinking to the narrowest in more than six months.

The spread was little changed today at 137 basis points. That’s down from 143 basis points on May 11 and matches the least since Nov. 1, according to data compiled by Bloomberg based on closing prices. It may struggle to breach the November low of 133 basis points, and encounter support at the 200-day moving average at 158 basis points, the data show.

German debt has returned 3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds lost 3.6 percent, and Italian securities gained 8.1 percent.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@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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