Bloomberg News

German Bunds Fall as Portuguese, Irish Debt Rallies

August 21, 2012

German Bunds Fall on Crisis Bets as Portuguese, Irish Debt Gains

German debt returned 2.9 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Photographer: Michele Tantussi/Bloomberg

German government bonds fell for a second day, pushing the nation’s two-year rate above zero for the first time in more than five weeks, on optimism a solution can be found to Europe’s debt crisis.

Portugal’s 10-year yield declined to a 15-month low and Ireland’s nine-year bond yield dropped below 6 percent for the first time since October 2010 amid speculation European leaders will make progress on supporting Greece at meetings this week. Spain’s two-year notes rose for a sixth day after borrowing costs dropped at a bill sale. Securities issued by so-called peripheral nations also rose on speculation the European Central Bank will buy them to help contain the financial turmoil.

“It’s looking increasingly likely that the ECB is undertaking serious discussions about a large-scale bond- purchase program,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “If you see such a program as a major step toward fiscal union and an implicit transfer of liabilities from periphery to core, then you would expect to see a selloff in bunds.”

Germany’s two-year note yield climbed three basis points, or 0.03 percentage point, to 0.008 percent at 4:33 p.m. London time, above zero for the first time since July 12. It touched 0.017 percent, the highest since July 6. The zero percent bond due June 2014 dropped 0.05, or 50 euro cents per 1,000-euro ($1,247) face amount, to 99.99. The nation’s 10-year yield climbed five basis points to 1.55 percent.

Greek Meetings

Germany plans to sell as much as 5 billion euros of two- year zero percent notes at an auction tomorrow.

Spain’s 10-year yield fell seven basis points to 6.21 percent after declining to 6.16 percent yesterday, the lowest since July 2. The two-year rate slid 10 basis points to 3.48 percent. Italy’s 10-year bond yield slipped 12 basis points to 5.65 percent.

Luxembourg Prime Minister Jean-Claude Juncker, the head of the euro group of finance ministers, is due to visit Greece tomorrow, while German Chancellor Angela Merkel and French President Francois Hollande are scheduled to meet in Berlin on Aug. 23 and both are set to talk separately with Samaras later in the week.

Concessions from Greece’s international creditors are possible so long as Prime Minister Antonis Samaras shows a willingness to meet the main targets set out in his country’s bailout program, a senior lawmaker with Merkel’s party said.

Spain sold its full allocation of 4.5 billion euros of 12- and 18-month bills at today’s auction, with yields averaging 3.07 percent on the one-year debt, down from 3.918 percent at the previous sale on July 17.

Euro ‘Fears’

The nation’s two-year yield has fallen from a euro-era high of 7.15 percent set on July 25 amid speculation policy makers will increase efforts to rein in borrowing costs. ECB President Mario Draghi said on Aug. 2 the central bank may buy debt together with the region’s bailout funds to address rates that are elevated on “fears of the reversibility of the euro.”

Germany’s Spiegel magazine reported on Aug. 19 that the ECB may seek to impose a ceiling on the borrowing costs of the euro- zone’s most heavily indebted economies.

The euro strengthened 1 percent to $1.2473, and the Stoxx Europe 600 Index (SXXP) of shares gained 0.4 percent.

Portugal’s 10-year bond yield dropped 35 basis points to 9.25 percent, the lowest since May 20, 2011.

The yield today dropped below the closing level of 9.58 percent on May 3, 2011, the day the nation reached an agreement for a 78 billion-euro rescue plan from the European Union.

‘Gaining Traction’

“The improvement in sentiment has been driven primarily by reports of the ECB yield targeting gaining traction,” said Brian Barry, an analyst at Investec Bank Plc in London. “Excluding Greece, Portuguese yields are the highest amongst the peripherals, so naturally have the greatest scope to outperform.”

Irish nine-year yields dropped eight basis points to 5.96 percent, the lowest level since October 2010.

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

German debt returned 2.9 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities fell 1.9 percent, and Italy’s rose 11 percent.

To contact the reporters on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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


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