BLBG: European Bonds Fall as Gains by Stocks, Low Yields Deter Buyers
European 10-year government bonds declined on the first trading day of the year as gains by stocks and yields near record lows deterred demand for the relative safety of fixed-income assets.
Two-year German notes were little changed after posting their biggest annual advance since 1995 last year, pushing yields to the lowest level since at least 1990, amid speculation policy makers will keep cutting interest rates to ease a regional recession. Stocks in Europe and Asia rose today. Bonds stayed lower even after a report showed the euro-region’s manufacturing industry contracted last month at a faster pace than initially estimated.
“January tends to be a bearish month for bonds,” said Padhraic Garvey, head of investment-grade strategy in Amsterdam at ING Groep NV. “Yields are low as a lot of pessimism and risks have been priced in, and I expect that to be unwound a bit this month. Yields will pick up, but I don’t see it as the end of the rally in bonds.”
The yield on the 10-year German bund, Europe’s benchmark government security, climbed five basis points to 3 percent as of 9:51 a.m. in London, after falling to 2.886 percent on Dec. 30, the lowest level since at least 1989. The 3.75 percent security due January 2019 fell 0.41, or 4.1 euros per 1,000-euro ($1,396) face amount, to 106.41.
The two-year yield slipped one basis point to 1.74 percent. The yield will rise to 2.05 percent by the end of 2009, according to economists in a Bloomberg survey. Yields move inversely to bond prices.
Manufacturing Recession
A manufacturing index for the euro region dropped to 33.9 in December from 35.6 in November. The result for last month was below an initial reading of 34.5.
The difference in yield, or spread, between two-year notes and 10-year bunds rose to 125 basis points, the most since Nov. 21. The so-called steeper yield curve indicates investors raised bets that the economic slump will worsen, forcing policy makers to cut borrowing costs.
The European Central Bank cut its key interest rate by 175 basis points since October to 2.50 percent in the first reductions since June 2003 after the global financial crisis pushed up lending costs and the euro region fell into its first recession in 15 years. The ECB will lower the rate to 1.50 percent by the second quarter, according to economists in a Bloomberg survey.
German bonds returned 12.2 percent last year, compared with 13 percent for gilts and about 14 percent for U.S. Treasuries, according to Merrill Lynch & Co.’s German Federal Government, U.K. Gilts and U.S. Treasury Master indexes.
