BLBG: European Bonds Drop as Stock-Market Gains Sap Demand for Safety
By Kim-Mai Cutler
Oct. 29 (Bloomberg) -- European government bonds declined as equity markets around the world extended their rally, damping investor demand for the safest assets.
The drop pushed the yield on the two-year note up from the lowest level in three years after stocks in the region followed Asian markets higher amid speculation central banks will lower interest rates. Bonds also climbed as the cost of protecting European corporate debt from default fell.
``The big reason for the decline is this big movement in equities,'' said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking arm of Credit Agricole SA. ``The bond market hasn't sold off massively however as we've still got a very broken market.''
The yield on the 10-year German bund, Europe's benchmark government security, rose 1 basis point, or 0.01 percentage point, to 3.76 percent by 8:35 a.m. in London. The 4.25 percent bond due July 2018 declined 0.11, or 1.1 euros per 1,000-euro ($1,273) face amount, to 103.85.
The yield on the two-year note was little changed at 2.54 percent after yesterday slipping to the lowest level since October 2005. Yields move inversely to bond prices.
The MSCI World Index of stocks added 2.4 percent, and Europe's benchmark Dow Jones Stoxx 600 gained more than 5 percent. Equities in Asia rose amid speculation Japan will cut interest rates and China take steps to boost equities. U.S. stock-index futures slipped.
Europe Favored
European bonds outperformed U.S. Treasuries this month, handing investors a 2.5 percent return, compared with 0.5 percent for their U.S. counterparts, according to Merrill Lynch & Co.'s EMU Direct and Treasury Master indexes.
Declines for bonds may be limited before a government report that will probably show inflation in Germany slowed in October, giving the European Central Bank more scope to lower interest rates.
The rate of German inflation slipped to 2.6 percent, from 3 percent in September, using a harmonized European Union method, according to the median estimate of 14 economists surveyed by Bloomberg. The Federal Statistics Office in Wiesbaden releases its report today.
To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net
