German bunds slumped this week, with 10-yields rising the most in five months, as speculation U.S. policy makers will reduce asset purchases reduced demand for fixed-income assets around the world.
Italian and Spanish bonds dropped for a seventh week as the prospect of an end to Federal Reserve stimulus weighed on higher-yielding assets. Greek securities slumped, pushing rates up by the most in a year, while the extra yield that investors demand to hold 10-year Spanish bonds instead of German bunds widened to the most two months. Fed Chairman Ben S. Bernanke said after a policy meeting on July 19 the central bank may reduce bond buying this year if the economy improves.
“This was more of a concrete proposal than the market had been anticipating and as such we saw a massive selloff, notably amongst all asset classes,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “We saw equities move sharply, safe havens sell off across the curve, peripheral yields far higher but also peripheral spreads widening.”
Germany’s 10-year yield rose 21 basis points, or 0.21 percentage point, this week to 1.73 percent, the biggest increase since the period ended Jan. 4. The 1.5 percent bund maturing in May 2023 fell 1.9, or 19 euros per 1,000-euro face amount, to 97.97.
The Fed will pare its monthly bond purchases to $65 billion in September, from the current $85 billion, and end buying altogether in June 2014, according to the plurality of estimates by 54 economists in a Bloomberg survey conducted June 19-20 after Bernanke’s press conference in Washington.
Italy’s 10-year yield jumped 34 basis points this week to 4.62 percent after rising to 4.62 percent yesterday, the highest level since April 3. The rate on similar-maturity Spanish bonds climbed 33 basis points to 4.91 percent. The seven-week increase in yields is the longest since November 2011.
The extra yield on Spanish 10-year bonds over German bunds expanded 12 basis points this week to 319 basis points after reaching 322 basis points on June 20, the widest level since April 23.
Greek 10-year yields surged 137 basis points this week to 11.30 percent, the biggest increase since May 2012. The rate climbed to 11.64 percent yesterday, from this year’s low of 8.10 percent on May 22.
Demand fell at auctions of Spanish and German bonds this week. Buyers bid for 1.84 times the 1.52 billion euros of Spanish 10-year securities sold on June 20, down from 2.52 times at a previous auction on June 6. The bid-to-cover ratio at a German sale of similar-maturity bunds on June 19 declined to 1.53 times from 1.58 on May 22.
German bonds handed investors a loss of 1.6 percent this year through June 20, according to Bloomberg World Bond Indexes. Spanish securities returned 4.6 percent and Italian bonds gained 1.9 percent.
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