German government bonds declined for a second week, with 10-year (GFRN10) yields rising to a three-month high, as concern the Federal Reserve will begin reducing stimulus measures dented the appeal of fixed-income assets.
French and Belgian securities also dropped as bonds around the world were set for the worst month in almost a decade. Italian 10-year bond yields rose less than those of their German peers after the nation sold 5.75 billion euros ($7.47 billion) of debt maturing in 2018 and 2023. Fed Chairman Ben S. Bernanke said last week that the central bank could reduce record stimulus if the economy shows sustained improvement.
“The key issue is the current debate about whether the Fed will get ahead of the curve in withdrawing quantitative easing,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “Liquidity is the key driver. The risk is the Fed is going to get ahead of itself.”
Germany’s 10-year yield climbed seven basis points, or 0.07 percentage point, this week to 1.51 percent at 5 p.m. London time yesterday. The yield increased to 1.55 percent on May 29, the most since Feb. 25. The 1.5 percent bond due in May 2023 fell 0.68, or 6.80 euros per 1,000-euro face amount, to 99.96.
French 10-year yields increased 13 basis points this week to 2.07 percent, while the rate on similar-maturity Belgian debt rose 14 basis points to 2.24 percent.
Italian bonds outperformed their German peers as the nation met its target amount at a debt auction on May 30, signaling demand for the securities had picked up despite losses last month.
The nation auctioned 3 billion euros of bonds due in May 2023 as investors bid for 1.38 times the amount of securities allotted, compared with a so-called bid-to-cover ratio of 1.42 on April 29. Investors also bought 2.75 billion euros of 2018 securities, as well as 3.49 billion euros of zero-coupon and inflation-linked debt at separate sales on May 28.
The yield on Italian 10-year debt was at 4.16 percent yesterday, two basis points higher than on May 24. The rate climbed to 4.23 percent before the May 30 auctions, the highest since April 19. The yield difference, or spread, between the securities and similar-maturity German bonds fell five basis points to 2.65 percentage points this week.
The European Central Bank will keep its benchmark interest rate at a record-low 0.5 percent when it meets on June 6, according to 54 of 56 analysts in a Bloomberg survey. Two strategists predict the bank will cut rates by 25 basis points.
France is selling debt due in 2020, 2023 and 2027 next week, while Spain, Germany and Austria also auction bonds.
German government bonds handed investors a loss of 1.5 percent last month through May 30, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 1.2 percent and Italian debt declined 0.5 percent.
Securities in the Bank of America Merrill Lynch Global Broad Market Index fell 1.4 percent last month through May 30, poised for the steepest loss since April 2004.
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