Bloomberg News

Bunds Advance as German Services Contract; Italian Bonds Decline

July 04, 2012

German government bonds rose after a survey of purchasing managers showed the nation’s service industries unexpectedly shrank last month, spurring demand for the region’s safest assets.

Five-year notes advanced for a third day as bidding increased at a 3.3 billion-euro ($4.15 billion) auction of the securities. Italian 10-year bonds fell for the first time in five days after the budget deficit rose to the highest level in three years amid a deepening recession. The European Central Bank will cut interest rates at a policy meeting tomorrow, according to a Bloomberg News survey of economists.

“There’s a risk-off feel in the air today and that’s supporting bunds,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “Expectations of ECB action tomorrow and anxiety about the weaker PMI data have underpinned the safe-haven bid.”

Germany’s five-year yield fell seven basis points, or 0.07 percentage point, to 0.49 percent at 4:27 p.m. London time after dropping to 0.48 percent, the least since June 19. The 0.5 percent note due in April 2017 gained 0.325, or 3.25 euros per 1,000-euro face amount, to 100.065. The 10-year yield declined eight basis points to 1.46 percent.

A gauge of German service industries slid to 49.9 in June, below a previous estimate of 50.3, London-based Markit Economics said. A reading below 50 indicates contraction. A composite index for euro-area services and manufacturing industries rose to 46.4 from May, Markit said, above an estimate of 46 published on June 21.

German Auction

Investors bid for 2.7 times the amount of German five-year notes allotted, up from 1.56 at the prior sale on June 6, and the second highest since May 2004. The securities were sold at an average yield of 0.52 percent, versus 0.41 percent in June.

The extra yield, or spread, investors demand to hold 30- year bunds instead of five-year notes expanded to 182 basis points, the most since Sept. 9. The spread reached 188 basis points on Sept. 5, the widest since June 2010.

ECB policy makers will cut their benchmark rate by 25 basis points to a record 0.75 percent tomorrow, according to the median forecast in a Bloomberg survey of 63 economists. Five predict a reduction of 50 basis points and 11 foresee no change.

Italian Bonds

Italian 10-year bonds dropped after the national statistics institute said the budget deficit increased to 8 percent of gross domestic product in the three months through March, from 7 percent a year earlier.

“The budget deficit numbers weren’t very pretty,” Merrill Lynch’s Wraith said. “They serve as another reminder that the contortions the periphery are going through aren’t obviously bearing fruit. It’s becoming harder rather than easier to continue down the path of fiscal constraints.”

Italian 10-year yields climbed 15 basis points to 5.78 percent after dropping to 5.59 percent, the lowest since June 7.

Spanish government securities also declined, with the 10- year yield rising 16 basis points to 6.41 percent.

Greek 10-year bonds gained as International Monetary Fund Managing Director Christine Lagarde said she wasn’t in the mood to revisit the terms of the nation’s financial bailout.

The yield on the nation’s 2 percent security due in February 2023 dropped eight basis points to 26.05 percent, leaving the price at 17.61 percent of face value. The yield climbed 40 basis points yesterday.

‘Renegotiation Mood’

“I am not in a negotiation or renegotiation mood at all,” Lagarde said in an interview on CNBC television yesterday, as officials from the IMF, ECB and the European Commission began a visit to Greece today to assess progress in implementing the terms of the second international bailout.

Greek Prime Minister Antonis Samaras put together a coalition government after the June 17 elections with pledges to renegotiate parts of the 130 billion-euro second bailout from the European Union and the IMF.

Irish securities due in October 2020 declined before the country sells 500 million euros of three-month bills tomorrow in its return to financial markets for the first time in almost two years. The yield on the 5 percent bond maturing in October 2020 increased four basis points to 6.27 percent.

Treasury 10-year futures expiring in September gained 0.2 percent to 133 29/32. Trading in Treasuries is shut worldwide today due to the July 4 holiday in the U.S.

German government bonds have returned 2.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian debt gained 10 percent, and Spanish securities lost 2.9 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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