Bloomberg News

German Bonds Rise on Slowdown Signs; Yields Fall to 2-Month Low

November 09, 2012

Germany’s government bonds advanced, pushing 10-year yields to the lowest level in more than two months, as reports showed industrial production slumped in France, Italy and Finland.

Austrian, Dutch and Belgian securities also gained as signs the regional slowdown is spreading boosted demand for safer assets. Spain’s bonds headed for a third weekly decline as optimism waned that the nation will ask for an international bailout. European Central Bank President Mario Draghi said after a policy meeting yesterday that economic activity in the euro area was expected to “remain weak.” Greek bonds gained.

“Recent data showed the euro region is still in an economic soft patch,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Things will start to improve next year, but any recovery will be gradual. In the near-term, core bond yields will stay low.”

Germany’s 10-year yield dropped two basis points, or 0.02 percentage point, to 1.34 percent at 4:31 p.m. London time after declining to 1.31 percent, the lowest level since Aug. 31. The 1.5 percent bund due in September 2022 gained 0.18, or 1.80 euros per 1,000-euro ($1,271) face amount, to 101.42. The yield has dropped 11 basis points this week.

German two-year yields were little changed at minus 0.033 percent after falling to minus 0.055 percent on Nov. 7, the least since Aug. 13. A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.

Production Slides

French industrial production shrank 2.5 percent in September from a year earlier, after declining an annual 0.9 percent in August, the national statistics office said. Factory output slid 4.8 percent in Italy and 1.7 percent in Finland.

Economic confidence in the 17-member euro area fell to a three-year low in October, the European Commission said last month, adding to signs that the region is in recession after gross domestic product shrank 0.2 percent in the second quarter. Third-quarter GDP is due on Nov. 15.

Austrian 10-year securities gained for an eighth day with the yield declining three basis points to 1.81 percent after falling to a record 1.807 percent. Similar-maturity Dutch yields dropped one basis point to 1.61 percent and France’s fell three basis points to 2.13 percent.

Weekly Decline

Spain’s 10-year bonds headed for their longest run of weekly declines since June as the government of Prime Minister Mariano Rajoy refrains from asking for an international bailout to fix its debt crisis.

Rajoy said on Nov. 6 he needed to know how much the ECB would push down Spain’s borrowing costs before his government asks for help and signs up to the conditions attached. Bond yields have already dropped and there’s no point seeking a bailout if they don’t fall any further, he told Cope Radio. Spain sold three-, five- and 20-year bonds yesterday.

“Investors are beginning to lose patience with the Spanish authorities,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Even though the auction was well received yesterday, ironically the Spanish government used that as an excuse not to ask for a sovereign bailout. Consequently there’s been some upward pressure on Spanish yields.”

Spain’s 10-year yield slid three basis points today to 5.83 percent, having climbed 17 basis points this week. Yields have risen about 60 basis points since falling to 5.26 percent on Oct. 19, the lowest since April.

Greek Bonds

Greek 10-year bonds gained for the first time in three days as a European Union official said governments will find a way of tiding the country past a scheduled Nov. 16 redemption of maturing bills to prevent an “accidental default.”

A Greek exit from the euro area is still a risk and efforts by the ECB to ease the region’s debt crisis can only buy time for lawmakers to take action, Moody’s Investors Service said.

Ending the financial woes in Europe will be a multiyear process because “there’s no quick fix,” Yves Lemay, a managing director at the ratings company, said in an interview in Brussels. Greece leaving the euro “remains a risk and if it were to crystalize, that event would generate a significant economic event,” he said.

Greece’s 10-year yield fell eight basis points to 17.99 percent, leaving the price at 30.80 percent of face value.

German bonds returned 4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities gained 2.1 percent, while Italy’s earned 17 percent.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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


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