German bonds declined after a report showed the nation’s import prices gained for a second consecutive month in September, sapping demand for the euro- region’s safest assets. The declines pushed the yield on the two-year note to within one basis point of its highest in more than six months, while the 10-year bund yield was near the highest in more than two months. German import prices rose by 0.3 percent in September from a month earlier, up by 9.9 percent year-over- year. Greek bonds fell after Pacific Investment Management Co. said the nation may default within three years. “Bunds were a touch lower after the import price data,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Ten-year bund yields have found good support around the 2.5 percent level, but it’s difficult to see a significant rally near-term. The market is biding time ahead of the Federal Reserve’s meeting next week.” The yield on the bund, Europe’s benchmark security, rose six basis points, or 0.06 percentage point, to 2.51 percent as of 12:21 p.m. in London. It reached 2.517 percent earlier, the most since Aug. 10. The 2.25 percent security maturing in September 2020 fell 0.53, or 5.3 euros per 1,000-euro ($1,393) face amount, to 97.76. The two-year note yield gained seven basis points to 1.03 percent. It touched 1.036 percent earlier today, the highest since April 12, according to Bloomberg generic data. Bunds Safety Signs of a slowing global economic recovery and concern about the finances of so-called peripheral nations such as Greece, Spain and Ireland have driven investors to the relative safety of bunds amid mounting speculation of more asset purchases, known as quantitative easing, by the Fed. The U.S. central bank may buy $2 trillion of assets to stimulate the world’s largest economy, Goldman Sachs Group Inc. said in a report yesterday. The Fed may begin its purchases with $500 billion over six months, according to Goldman economists led by Jan Hatzius in New York. The company, one of the 18 primary dealers authorized to trade directly with the Fed, said policy makers will announce the plan at their next meeting Nov. 2-3. Bunds extended their decline after U.K. data showed the nation’s economy grew faster than forecast in the third quarter. U.K. GDP Rises U.K. gross domestic product rose 0.8 percent in the three months through September after increasing 1.2 percent in the previous quarter, the Office for National Statistics said in London today. Economists expected a 0.4 percent gain, according to the median of 35 forecasts in a Bloomberg news survey. Greece is likely to default within three years because budget-cutting measures won’t be enough to reduce the nation’s sovereign debt burden, according to Pimco Chief Executive Officer Mohamed A. El-Erian. A default is likely “as long as you can contain the contagion to other countries and it is done through orderly restructuring and repricing to retain competitiveness,” El- Erian said at a conference sponsored by the Economist magazine in New York yesterday. Greek bonds fell, with the 10-year bond yield increasing 33 basis points to 9.76 percent, the highest since Oct. 8. The extra yield investors demand to hold Greek 10-year debt instead of bunds rose by 25 basis points to 716 basis points, the most since Oct. 8. “Greek bonds have been under pressure since El-Erian’s comments,” said Orlando Green, assistant director of capital- markets strategy at Credit Agricole Corporate & Investment Bank in London. “The near-term picture doesn’t look so bad for Greece, but it’s a long journey ahead.” Local Elections Prime Minister George Papandreou urged Greeks to back his ruling party and cast a vote of hope and change, not protest, in next month’s local elections, his first test at the ballot box since crafting a 110 billion-euro bailout for the country. “If we stop now and don’t continue with major changes, the sacrifices we have made so far will be lost,” Papandreou said in comments televised yesterday on state-run NET TV and six other television channels. “And instead of making the crisis an opportunity, we will probably find ourselves in a worse situation.” Belgium’s political stalemate may have pushed the nation’s debt yields an extra 20 basis points above those of German debt, according to a senior official at the country’s debt agency. “The fact that we are in a phase where the politicians are still trying to form a government has weighed on the spread,” Anne Leclercq, director for Treasury and Capital Markets at the Belgian Debt Agency, said in an interview in Brussels late yesterday. Caretaker Government Belgium has a caretaker government four months after an inconclusive election as Flemish nationalists and francophone parties fail to reconcile their differences. The Belgian-German 10-year bond-yield spread narrowed five basis points to 79 basis points today. It reached 91.7 basis points on Sept. 24, the most since June 25. Italy sold 2.5 billion euros of zero-coupon notes due in 2012 and 9 billion euros of six-month Treasury bills. Spain sold 3.18 billion euros of bills today, below the maximum target of 4 billion euros set for the auction, the Bank of Spain said. German bonds have returned 8.3 percent this year, compared with 8.8 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities have gained 4.4 percent, Spanish debt has risen 2.5 percent and Belgian bonds have returned 5.8 percent, while Greek debt has lost 11 percent, the indexes show. Sluggish Recovery Sweden’s central bank raised its benchmark interest rate for a third time since July while policy makers said the prospect of a sluggish global recovery suggests further tightening plans should be scaled back. The Stockholm-based Riksbank raised the seven-day repo rate by 0.25 percent, or a quarter of a percentage point, to 1 percent, it said today on its website. The decision was expected by all 20 economists surveyed by Bloomberg. “The Swedish economy is strong and growing in exports, households and investments,” said Annika Winsth, chief economist at Nordea Bank AB in Stockholm, before the announcement. Still, previous policy forecasts would have left rates “a bit high in two years’ time.” To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net

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