Bloomberg News

German Bunds Fall as Spain’s Bonds Rise on Credit Line Prospects

October 16, 2012

Germany’s bonds fell, pushing 10- year yields to the highest level in three weeks, after two lawmakers said the nation was open to Spain seeking a precautionary credit line from Europe’s rescue fund.

Spanish bonds advanced as the comments by Michael Meister, a deputy caucus leader of Chancellor Angela Merkel’s Christian Democratic bloc, and Norbert Barthle, the party’s budget spokesman, signaled a reversal of Finance Minister Wolfgang Schaeuble’s public position. Italian securities also gained, with 10-year yields dropping to the lowest in almost seven months. European Union leaders are scheduled to gather for a summit in Brussels on Oct. 18-19.

“The market seems pleased by the German openness to a bailout for Spain,” said Alessandro Giansanti, a senior strategist at ING Groep NV in Amsterdam. “The precautionary credit line will probably have less conditions than a full bailout and it will be easier for Spain to sell it internally. German yields will lose a part of their flight-to-quality premium.”

Germany’s 10-year bund yield climbed seven basis points, or 0.07 percentage point, to 1.55 percent at 4:18 p.m. London time after touching 1.56 percent, the highest level since Sept. 26. The 1.5 percent security due September 2022 dropped 0.67, or 6.70 euros per 1,000-euro ($1,302) face amount, to 99.58.

Belgium’s 10-year yields rose four basis points to 2.38 percent, snapping a nine-day drop. The rate earlier fell to 2.322 percent, the lowest since Bloomberg started collecting the data in 1993.

Rajoy’s Request

For Spain, where Prime Minister Mariano Rajoy’s government has said it won’t request aid until the terms are clearer, a precautionary credit line “would be a possible move,” Barthle said today in a text message. The 500 billion-euro permanent rescue fund, the European Stability Mechanism, which came into force on Oct. 8, “envisages help for sectors in the economy with limited conditionality.”

Should Spain receive such aid, it would be a positive for financial markets, said Thomas Kressin, senior vice-president and head of European foreign exchange at Pacific Investment Management Company.

“The market reaction with regards to Spain would be much more favorable now with regards to a precautionary credit line,” Kressin told delegates at the Bloomberg FX12 Summit in London. “Spain would still have open-market access. That would be a market-friendly outcome.”

Nordea’s From forecasts 10-year bund yields will end the year at 1.75 percent.

Spanish Sale

Spanish 10-year yields declined two basis points to 5.80 percent, while rates on two-year notes dropped six basis points to 3.14 percent. Italian 10-year yields slid as much as nine basis points to 4.89 percent, the least since March 20.

Spain sold 4.86 billion euros of 12- and 18-month bills at an auction today, more than the maximum target of 4.5 billion euros. Belgium, Greece and the European Financial Stability Facility also sold bills, while the European Union’s temporary bailout fund sold 5.9 billion euros of five-year notes via banks.

Bunds were also pushed lower after the ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, climbed to minus 11.5 from minus 18.2 in September. Economists had forecast an increase to minus 14.9, according to the median of 36 estimates in a Bloomberg News survey.

Progress Possible

“It all appears to the market that the macro economy is not as bad as feared,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “There might be some progress with respect to Spain, and so some progress with respect to the European debt crisis, so all this might put bunds slightly under pressure.”

Nordea’s From forecasts 10-year bund yields will end the year at 1.75 percent.

Volatility on Finnish bonds was the highest in euro-area markets today, followed by Germany and France, also perceived as haven assets, according to measures of 10-year or equivalent- maturity debt, the spread between two-year and 10-year securities and credit-default swaps.

The rate on Finland’s 10-year securities climbed six basis points to 1.79 percent.

German bonds returned 3.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities rose 1.8 percent and Belgian debt earned 14 percent.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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