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Bunds Snap 3-Day Advance as Spanish Bonds Rise Amid Crisis Talks

August 27, 2012

German 10-year bonds snapped a three-day advance after Finance Minister Wolfgang Schaeuble said Germany and France will create a working group to strengthen a fiscal and monetary union in Europe.

Two-year yields were little changed after Germany sold 1.975 billion euros ($2.48 billion) of one-year bills. The nation’s 10-year securities climbed earlier as Bundesbank President Jens Weidmann reiterated his opposition to sovereign debt purchases by the European Central Bank. Spain’s 10-year bonds rose for the first time in four days.

“We are now awaiting some key decisions and the market will be in a wait-and-see mode,” said Niels From, chief analyst at Nordea Bank AB (NDA) in Copenhagen. “From a fundamental perspective they do look expensive but the safety of bunds remains appealing.”

The German 10-year yield climbed one basis point, or 0.01 percentage point, to 1.37 percent at 11:45 a.m. London time, after dropping to 1.32 percent on Aug. 24, the lowest since Aug. 3. The 1.75 percent bond due in July 2022 slipped 0.11, or 1.10 euros per 1,000-euro face amount, to 103.505.

France and Germany will work on “structural” solutions, French Economy and Finance Minister Pierre Moscovici said after meeting with his German counterpart in Berlin.

‘Addictive’ Financing

ECB President Mario Draghi said this month the central bank may intervene in the secondary market to lower borrowing costs in countries that ask for Europe’s bailout fund to purchase their securities. The ECB may wait for Germany’s Constitutional Court to rule on the legality of Europe’s permanent bailout fund before announcing its plans, two central bank officials said last week, declining to be identified because the deliberations aren’t public.

“We shouldn’t underestimate the danger that central bank financing can become addictive like a drug,” Weidmann said in an interview with Der Spiegel magazine yesterday. “Such policy is too close to state financing via the money press for me.”

Bunds may decline if the ECB comes up with a program that is “convincing” to investors, who may switch to higher- yielding assets and push the 10-year yield to 1.75 percent by year-end, Nordea’s From said. The median of 29 analysts’ and economists’ predictions compiled by Bloomberg is for the yield to reach 1.55 percent by Dec. 31.

German two-year note yields stayed below zero as the country sold securities due in 12 months.

Bill Auction

Germany auctioned 1.975 billion euros of one-year bills at an average yield of minus 0.0246 percent, the Bundesbank said today in a statement. That compares with minus 0.054 percent at a sale of similar-maturity debt on July 23. Germany got bids for 3.86 billion euros of the bills, versus a maximum sales target of 3 billion euros, the Bundesbank said. France also plans to sell short-maturity debt today.

German two-year yields rose one basis point to minus 0.002 percent, after falling to a record 0.097 percent on Aug. 2 and July 31. Yields below zero mean investors who hold the debt to maturity will receive less than they paid to buy them.

“There’s a huge amount of event risk in September and against that backdrop, investors are still happy to keep some money in core markets” even with negative yields, said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “There’s so much uncertainty, and many hurdles for markets to overcome.”

Business Confidence

An industry report showed that business confidence in Europe’s largest economy fell in August for a fourth consecutive month. The Ifo institute’s business climate index, based on a survey of 7,000 executives, dropped to 102.3 from 103.2 in July. That’s the lowest reading since March 2010.

Spanish 10-year bonds advanced, with the yield declining three basis points to 6.39 percent. Yields on similar-maturity Italian securities were little changed at 5.71 percent.

Volatility in Irish government debt was the highest in the euro area today, followed by Portugal, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit default swaps. The yield on Ireland’s 4 percent debt due January 2014 fell five basis points to 2.49 percent, while that on Portugal’s 4.375 percent security maturing in June 2014 dropped 10 basis points to 4.98 percent.

German bonds returned 3.8 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities fell 2.5 percent, and Italy’s gained 11 percent.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at;

To contact the editor responsible for this story: Paul Dobson at

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