Germany’s bonds fell, with 10-year yields climbing to the highest level in two months, as signs that global growth is gaining momentum undermined demand for the region’s safest assets.
Benchmark bund yields rose the most this week since July as data today showed German retail sales improved and U.S. employers hired more workers than economists forecast. Spanish and Italian notes advanced, extending their largest weekly gains since September, as reports showed services in the two nations contracted at a slower pace last month. Investors should buy Europe’s so-called peripheral bonds should they decline, Bank of America Corp.’s Merrill Lynch Wealth Management said.
“There is a bit of a recovery in sentiment,” said Peter Schaffrik, head of European interest-rate strategy at Royal Bank of Canada in London. “The expectations for Europe are not as dire as they used to be. There is a decent chance that bund yields could go to the upper end of their range” and reach about 1.75 percent this quarter, he said.
Germany’s 10-year yield climbed six basis points, or 0.06 percentage point, to 1.54 percent at 4:50 p.m. London time after reaching 1.56 percent, the highest level since Oct. 26. The 1.5 percent bond maturing in September 2022 fell 0.515, or 5.15 euros per 1,000-euro ($1,306) face amount, to 99.67. They rose 23 basis points this week.
U.S. payrolls rose by 155,000 last month following a revised 161,000 gain in November that was more than initially estimated, the Labor Department said in Washington. The estimate of 82 economists surveyed by Bloomberg was for an increase of 152,000. German retail sales, adjusted for inflation and seasonal swings, increased 1.2 percent from October, the Federal Statistics Office said.
“Flight to safe havens is fading and we think we will see slightly better data out of Europe this quarter,” said Ralf Umlauf, a research analyst at Landesbank Hessen-Thueringen in Frankfurt. “Fading support for bunds is pushing yields up.”
The 10-year German yield may increase to 1.70 percent by the end of March, Umlauf said. A Bloomberg survey of analysts predicts the rate will end the first quarter at 1.59 percent.
German bonds lost 1 percent this week through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italy’s debt gained 1.4 percent and Spain’s returned 1.5 percent.
Spanish two-year yield dropped to the lowest level in nine months after Markit Economics said its gauge of the nation’s services improved to 44.3 in December from 42.4 a month earlier. Italy’s services index climbed to 45.6 from 44.6, separate Markit data showed.
Spain’s two-year rates fell four basis points to 2.43 percent after reaching 2.39 percent, the least since March 21. They declined 46 basis points this week, the most since the period ended Sept. 7.
Similar-maturity Italian yields were little changed at 1.65 percent, having dropped 32 basis points since Dec. 28.
“I’m still quite happy not to push too far in terms of risk,” Johannes Jooste, a senior strategist at Merrill Lynch Wealth Management in London, said in an interview on Bloomberg Television’s “The Pulse” with Guy Johnson and Francine Lacqua. “Rather, have a mindset this year to use the volatility. Use the weakness to add” peripheral bonds, such as those from Italy and Spain, he said.
The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity German rates shrank to as narrow as 349 basis points, the least since April 2.
“Convergence is a trend,” Georg Grodzki, head of credit research at Legal & General Investment Management in London, which has about $290 billion of bond funds, said in an interview on Bloomberg Television’s “On the Move” with Francine Lacqua. “The trend, as it feels at the moment, will be a further convergence between the core and the periphery, on the assumption that the periphery is bottoming out.”
Volatility on Finnish debt was the highest among euro-area nations tracked by Bloomberg, followed by that of the Netherlands and Germany, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.
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