European 10-year bonds fell for a second day as gains in stocks and concern increasing sales of government debt will overwhelm the market sapped demand for the safety of fixed-income securities. German bunds led the declines as U.S. stocks gained for the first time in six days. France and Spain plan to sell as much as 11 billion euros ($14 billion) of bonds tomorrow and Greece may sell 7.5 billion euros of 10-year debt today. The difference in yield between two- and 10-year notes widened to the most in three weeks as traders added to bets the European Central Bank will cut its key interest rate. “The market is cheapening ahead of French and Spanish bond sales,” said Sean Maloney, a fixed-income strategist in London at Nomura International Plc. “There’s a lot of supply to take down and that will continue to be an occasional nuisance for the market. But given the fundamental backdrop, I see this as an opportunity to buy.” The yield on the 10-year bund, Europe’s benchmark government security, climbed eight basis points to 3.12 percent by 2:30 p.m. in London. The price of the 3.75 percent security due January 2019 fell 0.66, or 6.6 euros per 1,000-euro ($1,250) face amount, to 105.22. The yield on the two-year note was little changed at 1.18 percent. Bond yields move inversely to prices. The moves drove the difference in yield, or spread, between the two securities to 195 basis points, the widest since Feb. 9. The ECB will cut its benchmark rate by 50 basis points to 1.50 percent tomorrow, all 55 economists surveyed by Bloomberg predicted. Policy makers kept the rate on hold last month. Two- year yields declined 22 basis points since the decision. Yield Spread Stocks in Europe and Asia advanced, reducing demand for government securities. The MSCI World Index added 0.7 percent while the Standard & Poor’s 500 Index climbed 1.9 percent. The difference in yield between 10-year AAA-rated French bonds and benchmark German bunds widened to 58.6 basis points, the most in at least a decade, before France sells up to 7 billion euros of debt maturing in 2015, 2018 and 2025 tomorrow. “The yield spread suggests the market is preparing for Thursday auctions,” said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. Spain will sell as much as 4 billion euros of debt due in 2012 and 2013. Its five-year bonds yield 110 basis points more than the equivalent German notes, little changed from yesterday. The country lost its AAA rating at Standard & Poor’s last month. Greece may sell 7.5 billion euros ($9.4 billion) of a new 10-year bond today after receiving 12 billion euros in bids, according to bankers managing the sale. “Economic Madness” Further declines in bonds may be limited as demand was underpinned after a survey today showed the service industry slumped at a record pace last month. A gauge of service industry activity fell to 39.2 from 42.2 in January, according to Markit Economics. The reading was higher than the initial estimate of 38.9 on Feb. 20. “The market will have to be prepared for what could be a prolonged period of economic madness,” said Kornelius Purps, a fixed-income strategist in Munich at Unicredit Market & Investment Banking. “Most people hope the major economies will start normalizing in the second half of this year. The risk is that the market is underestimating the length, not the depth, of the recession. It’s worth staying long government bonds.” Derivatives trading shows some investors are betting on a reduction of more than 50 basis points by the ECB. The odds of such an outcome rose to 18 percent today, from 7 percent at the start of the week, according to a Credit Suisse Group index of probability based on overnight index-swap rates. To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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