Germany’s 10-year bond yield climbed to the highest level since October as an index of consumer confidence in Europe’s largest economy rose to the most in six years, damping demand for the region’s safest assets.
The additional yield investors demand to hold 10-year securities instead of two-year notes increased to the most in a month after the Federal Reserve said it would reduce its asset purchases, weakening demand for longer-maturity bonds. Yields on debt issued by the European Union fell relative to those on Germany’s even after the EU lost its top credit rating at Standard & Poor’s, which cited weakening political cohesion and finances. Italian bonds declined for a third day.
“We expect higher yields with Germany’s economy improving significantly and the Fed reducing its bond purchases,” said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt. “The German yield curve is likely to steepen further,” he said, referring to a chart plotting rates on bonds of varying maturities.
Germany’s 10-year yield was little changed at 1.87 percent as of 4:19 p.m. London time after climbing to 1.91 percent, the highest since Oct. 17. The price of the 2 percent bund due in August 2023 was 101.17. The rate has increased four basis points this week. The nation’s two-year yield added one basis point to 0.23 percent, still down from 0.25 percent on Dec. 13.
DZ Bank’s Reicherter forecast that German 10-year yields would be about 1.90 percent in three months.
A report from Nuremberg-based GfK SE showed a gauge of consumer confidence in Germany will climb to 7.6 in January, the highest reading since August 2007, from 7.4 this month. Producer prices (GRPFIYOY) dropped 0.8 percent from a year ago in November, compared with a 0.7 percent decline in the previous month, a separate report from the Federal Statistics Office in Wiesbaden showed.
Benchmark 10-year bunds fell yesterday after the Fed’s decision to cut its monthly purchases of Treasuries and mortgage-backed securities to $75 billion from $85 billion fueled speculation it would continue to taper acquisitions as the U.S. economy improves.
Italy’s 10-year yield climbed four basis points today to 4.12 percent, after rising to 4.13 percent, the highest since Dec. 9. The rate on similar-maturity Spanish debt increased one basis point to 4.14 percent.
S&P cut its long-term rating on the EU to AA+ from AAA, with the outlook at stable, the company said in a statement today. “The downgrade reflects our view of the overall weaker creditworthiness of the EU’s 28 member states,” S&P said.
The rate on the EU’s 2.75 percent security maturing in September 2021 fell one basis point to 1.78 percent, tightening its spread to Germany’s 3.25 percent bund due in July 2021 to 34 basis points.
“The EU is an infrequent borrower in any case and its bonds are normally placed with buy-and-hold accounts,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S in Copenhagen. “Therefore, downgrade news won’t affect the spread much.”
French securities were little changed after Agence France Tresor, the country’s debt-management office, said bond sales will rise to 173 billion euros next year from 169 billion in 2013. While European nations including Germany and the Netherlands have trimmed their borrowing plans, France’s President Francois Hollande has eased the pace of the government’s deficit reduction.
The yield on French 10-year bonds was at 2.47 percent. Two-year notes yielded 0.30 percent.
“Bond issuance for France remains elevated next year primarily because of its redemption profile,” said Steven Major, head of global fixed-income research at HSBC Holdings Plc in London. “That said, France hasn’t made much progress with its finances compared with Germany and some of its European peers.”
Finland said today it plans to sell two new benchmark bonds next year as its gross funding requirement is projected to rise to 17.8 billion euros from 17.45 billion euros this year. Finnish 10-year yields were little changed at 2.05 percent.
Germany said on Dec. 18 it plans to reduce its bill and bond sales by about 20 percent next year to 205 billion euros as tax revenues increase and Chancellor Angela Merkel seeks to end net new borrowing by 2015.
Volatility on German bonds was the highest in euro-area markets today, followed by those of France and Ireland, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.
German bonds lost 1.9 percent this year through yesterday, the worst performer of 15 euro-area debt markets tracked by Bloomberg World Bond Indexes. Spain’s returned 11 percent and Italy’s earned 7.7 percent.
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