Bloomberg News

German Bonds Drop as Danish Debt Slides on Pension Reform

June 13, 2012

German bonds declined, with 30-year yields posting the biggest two-day increase since 2009, as Denmark’s decision to ease liability rules for pension funds damped demand for longer-maturity fixed-income assets.

Germany’s borrowing costs increased at an auction amid speculation the country will have to do more to tackle Europe’s debt crisis after Spanish securities slumped yesterday. Italian notes fell as the nation paid the most this year at a sale of one-year bills today. Danish and Swedish debt tumbled and interest-rate swaps slid as Denmark joined other Nordic countries and the Netherlands in amending pension rules.

“In the past, when yields went down, the pension funds had to hedge by buying long-term bonds,” said Allan von Mehren, a fixed-income strategist at Danske Bank A/S (DANSKE) in Copenhagen. “Now that’s changed, a lot of funds are selling the long-end of the curve, particularly in Germany.”

Germany’s 30-year yield rose 13 basis points, or 0.13 percentage point, to 2.19 percent at 4:53 p.m. London time after climbing 15 basis points yesterday. The two-day increase is the biggest since January 2009. The 2.5 percent bond maturing in July 2044 fell 3.2, or 32 euros per 1,000-euro ($1,260) face amount, to 107.17.

The 10-year yield advanced seven basis points to 1.49 percent, having risen from a record low 1.127 percent on June 1.

Pension Liabilities

Denmark’s government will allow pension funds and life insurers to raise the discount rate they use to calculate their liabilities, the Business and Growth Ministry in Copenhagen said yesterday. When Sweden’s regulator pushed through a similar change in pension rules on June 7, Swedish 10-year yields surged more than 30 basis points because it reduced the incentive to buy longer-dated debt to balance liabilities.

Danish pension funds and life insurance companies affected by the rules hold assets of 2.1 trillion kroner ($356 billion), according to figures from the Financial Supervisory Authority.

The Finnish parliament voted today to allow pension funds to take more risk in their investments. The law will be implemented from the start of 2013. The Dutch government proposed on May 31 a way to make pension funds less reliant on daily interest rates.

Denmark’s 10-year yield rose two basis points to 1.32 percent. The rate on 30-year swaps in euros climbed 14 basis points to 2.24 percent, widening the difference in yield, with 10-year swaps by 12 basis points to 30 basis points. The swaps allow investors to bet on future borrowing costs.

Swedish Bonds

Sweden’s 10-year yield climbed eight basis points to 1.59 percent as the debt office raised its estimate for bond sales this year. The nation also sold 2.5 billion kronor ($356 million) of debt due June 2022 and March 2039.

Volatility on Swedish bonds was the highest in developed markets, followed by Germany and Italy, according to measures of 10-year debt, the spread between two- and 10-year securities and credit-default swaps.

Bunds fell yesterday and Spain’s 10-year bond yield surged to a euro-era record after Fitch Ratings said European countries may face downgrades because policy makers are failing to bring the sovereign debt crisis under control.

German Chancellor Angela Merkel said yesterday that burden sharing and ceding control over budgets “go hand in hand.”

“There’s the notion in the market that something is going to happen that moves Europe closer together and Germany will have to take more responsibility and put money on the table,” said Peter Schaffrik, head of European interest-rate strategy at Royal Bank of Canada on London. “I don’t expect this to be the end of the low-yield environment, but they could climb to 1.75 percent,” he said, referring to the yield on 10-year bunds.

German Sales

Germany sold 4 billion euros of 10-year bunds at an average yield of 1.52 percent today, up from a record-low 1.47 percent at the previous auction on May 16. The country also sold inflation-linked debt.

Spain’s 10-year yield advanced five basis points to 6.75 percent after rising to a euro-era high 6.83 percent yesterday.

Two-year Italian yields rose 19 basis points to 4.72 percent. The nation sold 6.5 billion euros of one-year bills at 3.97 percent, up from 2.34 percent at the previous auction on May 11. Investors bid for 1.73 times the amount offered, down from 1.79 times last month.

Ten-year bund futures fell for a second day, dropping 0.2 percent to 141.75.

“The technical situation in the daily chart remains under pressure, but this should not be enough to prompt any significant corrections,” analysts Viola Julien and Ralf Umlauf at Helaba Landesbank Hessen-Thueringen in Frankfurt wrote in a note to investors.

The bund future should return to a range of between 143.03 and 144.97, they wrote.

German debt has returned 3.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 5.4 percent, and Italian bonds rose 5.9 percent.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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