Bloomberg News

German, French Government Bond Yields Decline to Records

May 31, 2012

Germany’s bonds advanced, with 10- year yields sliding below 1.2 percent for the first time, as signs that European financial turmoil is sapping global growth boosted demand for the safest assets.

French, Dutch, Austrian and Finnish 10-year yields all declined to records after a U.S. report showed the world’s largest economy expanded less than previously estimated last quarter. Ireland’s bonds fell as voters cast their ballots on a European Union fiscal stability treaty. Ten-year bund yields dropped almost half a percentage point this month as Greece was locked in a political stalemate and Spain nationalized its third-largest banking group.

“The risk-off sentiment supports bunds and is filtering through to semi-core markets,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “With bund yields at record lows, some investors might be looking at alternatives, such as France and Austria.”

The German 10-year yield dropped seven basis points, or 0.07 percentage point, to 1.2 percent at 5 p.m. in London after falling to a record 1.199 percent. The 1.75 percent bond maturing in July 2022 advanced 0.66, or 6.60 euros per 1,000- euro ($1,236) face amount, to 105.185. The yield declined 46 basis points this month.

The two-year rate dropped to zero for a second day, while the 30-year yield fell as much as eight basis points to an all- time low 1.738 percent.

French Bonds

The French 10-year yield slid 13 basis points to 2.36 percent, after reaching a record 2.331 percent. Austria’s 10- year yield dropped to as low as 2.107 percent, the rate on similar-maturity Dutch debt declined to 1.611 percent, and Finland’s fell to 1.492 percent.

U.S. gross domestic product climbed at a 1.9 percent annual rate from January through March, down from a 2.2 percent previous estimate, the Commerce Department said in Washington. Other reports today showed more Americans than projected filed claims for jobless benefits last week and companies added fewer workers than forecast in May.

“Softer than expected U.S. data” gave support to bonds issued by nations such as Germany and France, Lloyds’ Wand said.

Italy’s Prime Minister Mario Monti and central bank chief Ignazio Visco today pressed Germany to back more aggressive efforts to contain the region’s debt crisis, setting up a south- north rivalry over how to stabilize the euro economy.

Third Month

German 10-year yields fell for a third month in May as Greece prepared to hold another general election after party leaders failed to agree on a ruling coalition after a poll on May 6. Spain nationalized the Bankia group on May 9 as it struggled to shore up the banking system.

Spanish bonds rose today, recouping some of their losses from yesterday when they slid on concern the nation will need to raise additional funds to support its banks.

The nation’s 10-year yield fell 10 basis points to 6.56 percent, after jumping 21 basis points yesterday. Italy’s 10- year rate dropped four basis points to 5.9 percent after increasing yesterday by 17 basis points.

“The market doesn’t want to get any shorter on Spanish and Italian debt.” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. A short position is a bet prices will decline.

The cost of insuring against default on Spanish sovereign bonds rose to a record. Credit-default swaps linked to Spain’s debt climbed 12 basis points to 6 percentage points, according to data compiled by Bloomberg.

Break-Even Rate

The German 10-year break-even rate, a gauge of market expectations for inflation derived from the difference in yield between regular and index-linked bonds, shrank to as little as 1.25 percentage points from this year’s high of 1.85 percentage points set on Jan. 23.

Ireland’s bonds declined even as opinion polls indicated voters will endorse measures designed to ease the euro region’s debt crisis. The surveys showed supporters of the Fiscal Stability Treaty lead by about 18 percentage points.

The yield on the nation’s 4 percent note due in January 2014 rose 16 basis points to 7.41 percent.

Volatility on Finland government bonds was the highest in euro-area markets today followed by Austria and France, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

German bonds maturing in more than a year returned 2.9 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 4.9 percent.

-- With assistance from Anchalee Worrachate in London. Editors: Paul Dobson, Nicholas Reynolds

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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