Bloomberg News

German Bonds Advance as Reports Show European Slowdown Deepening

November 10, 2012

Germany’s government bonds rose for a third week as data showed the economic slowdown is spreading to Europe’s largest economies, underpinning the case for the region’s central bank to cut interest rates to boost growth.

Ten-year bund yields dropped to the lowest level in two months yesterday as data showed industrial production slumped in France, Italy and Finland. European Central Bank President Mario Draghi said the euro-area economy was expected to “remain weak” after policy makers kept the main refinancing rate at a record low of 0.75 percent on Nov. 8. German two-year note yields were below zero every day this week. Spain’s bonds fell as optimism waned that the nation will ask for a bailout.

“The data, particularly industrial production, was disappointing, which is causing concern that Germany is being dragged down toward recession,” said Nick Stamenkovic, a fixed- income strategist at RIA Capital Markets Ltd. in Edinburgh. “Accordingly, 10-year yields have dropped.”

The yield on Germany’s 10-year bund fell 10 basis points, or 0.10 percentage point, this week to 1.35 percent at 5 p.m. London time yesterday, after declining to 1.31 percent, the lowest since Aug. 31. The 1.5 percent bund due in September 2022 gained 0.935, or 9.35 euros per 1,000-euro ($1,272) face amount, to 101.39.

Two-year yields declined four basis points to minus 0.033 percent. A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.

Output Data

French industrial production shrank 2.5 percent in September from a year earlier, after slipping 0.9 percent in August, the national statistics office said yesterday. Factory output slid 4.8 percent in Italy and 1.7 percent in Finland, reports showed. In Germany, production dropped 1.2 percent from a year earlier when adjusted for working days.

A euro-area report due next week is forecast to confirm the region’s economy slipped into another recession in the third quarter.

Gross domestic product in the 17-member euro area fell 0.1 percent in the second quarter, after sliding 0.2 percent in the first three months of the year, data from the European Union’s statistics office will show Nov. 15, according to the median prediction of 44 economists in a Bloomberg News survey.

Spain’s 10-year yields climbed 16 basis points this week to 5.82 percent, while similar-maturity Italian rates were three basis points higher at 4.97 percent. Spanish yields have increased for the past three weeks as the nation’s government refrained from asking for financial assistance from the ECB’s Outright Monetary Transactions program.

Germany is scheduled to sell 5 billion euros of two-year notes on Nov. 14, while France will auction securities maturing between 2014 and 2017, as well as inflation-linked bonds due from 2016 to 2027 on Nov. 15.

German bonds returned 4 percent this year through Nov. 8, 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: Lukanyo Mnyanda in Edinburgh News at lmnyanda@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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


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