Bloomberg News

German Bunds Rise 2nd Day on Concern ECB Measures to Fall Short

July 31, 2012

German government bonds rose for a second day amid speculation European policy makers will be unable to follow through on their pledge to shore up the single- currency area’s economy when they meet this week.

Two-year note yields fell to a record as investors returned to the region’s safest assets after a report showed euro-area unemployment climbed to an all-time high. Spanish bonds slid for the first time in five days as German Chancellor Angela Merkel’s coalition rejected granting the permanent rescue fund access to European Central Bank liquidity, fueling doubts that ECB PresidentMario Draghi will fulfill his pledge to “do whatever it takes to preserve the euro.”

“The market is having some second thoughts on what to expect on Thursday,” said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht. “It’s clear that the discussion is starting to move and that’s a positive thing, but there’s also a clear risk that Draghi may have to disappoint.”

Germany’s 10-year bund yield declined nine basis points, or 0.09 percentage point, to 1.28 percent at 4:52 p.m. London time after rising to 1.43 percent yesterday, the highest since July 5. The 1.75 percent security due July 2022 gained 0.89, or 8.90 euros per 1,000-euro ($1,228) face amount, to 104.34.

Two-year note yields dropped to a record minus 0.097 percent. Yields below zero mean investors who hold the debt to maturity will receive less than they paid to buy them.

Draghi’s Pledge

The Frankfurt-based ECB meets to review policy decision on Aug. 2. The central bank supported the bond market in previous periods of financial turmoil by purchasing securities in the secondary market and by offering unlimited three-year loans under its Longer-Term Refinancing Operations, some of which banks reinvested in sovereign debt.

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” Draghi said in a speech in London on July 26. “Believe me, it will be enough.”

German retail sales, adjusted for inflation and seasonal swings, fell 0.1 percent last month, after slipping 0.3 percent in May, the Federal Statistics Office said in Wiesbaden. Unemployment in the euro area was 11.2 percent in June, the European Union’s statistics office said in Luxembourg. That’s the highest since the data series started in 1995.

Spanish 10-year bond yields rose 14 basis points to 6.75 percent after tumbling more than 1 percentage point in the previous four days. Italy’s 10-year yield climbed six basis points to 6.08 percent.

‘Down Significantly’

“The rate in Spain has come down significantly,” said Matteo Regesta, a senior fixed-income strategist at BNP Paribas SA in London. “There is a risk for the market to be disappointed. The market wants the real thing, for the ECB to show them the money. If it doesn’t show the money we’ll move back.”

The rules of the European Stability Mechanism don’t foresee a license to allow refinancing at the ECB, the Berlin-based finance ministry said today in an e-mailed response to questions. The ministry isn’t holding talks on the topic and neither are secret meetings taking place on such proposals, it said.

The European Financial Stability Facility, the region’s rescue fund, sold 1.5 billion euros of 1.125 percent bonds maturing in 2015 at an average yield of 0.54 percent. Investors bid for 3.7 times the amount of securities allotted, the Bundesbank said in a statement.

Fund Intervention

The rescue fund hasn’t been asked to intervene in the bond market, the European Commission said today. “I can confirm that there has been no request by any member state, as I said yesterday, to resort to further EFSF support,” commission spokesman Antoine Colombani told reporters in Brussels.

German debt has returned 1.4 percent this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spain’s securities dropped 0.9 percent, while Italy’s declined 0.7 percent.

Volatility on Dutch bonds was the highest in euro-area markets today, followed by the Finland and Austria, according to measures of 10-year debt, the spread between two-year and 10- year securities and credit-default swaps.

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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