German bonds fell as reports showed the nation’s unemployment plunged in February while euro-area inflation remained above the European Central Bank’s ceiling. The decline pushed the yield on the 10-year bund up to the highest in more than a week. Irish 10-year bonds slid as talks began on forming a new government following a Feb. 25 election at which no party won a majority. The Netherlands began an auction of at least 5 billion euros ($6.9 billion) of 2021 debt while Austria sold 1.3 billion euros of 2015 and 2022 bonds. “Really good figures from the German labor market are a burden on the bund market at the moment,” said Ralf Umlauf, head of floor research at Helaba Landesbank Hessen-Thueringen in Frankfurt. He said expectations that the European Central Bank will reaffirm its anti-inflation stance this week are also a “burden on the market.” German 10-year yields were two basis points higher at 3.19 percent as of 11:10 a.m. in London. The 2.5 percent security due January 2021 fell 0.165, or 1.65 euros per 1,000-euro face amount, to 94.23. Two-year yields climbed three basis points to 1.55 percent. The Stoxx Europe 600 Index gained 0.5 percent and the MSCI Asia Pacific Index of shares climbed 1.2 percent, sapping demand for the relative safety of sovereign debt. The number of people out of work in Germany fell a seasonally adjusted 52,000 from January to 3.07 million, the lowest since September 1992, data from the Federal Labor Agency showed. Inflation in the 17-nation bloc quickened to 2.4 percent in February, from 2.3 percent a month earlier, the European Union’s statistics office said, increasing pressure on the European Central Bank to raise interest rates later this year. Growth Forecast A euro-region manufacturing gauge rose to 59 last month from 57.3 in January, London-based Markit Economics said today, confirming a Feb. 21 estimate. That’s the highest since June 2000. A reading above 50 indicates expansion. Gross domestic product in the euro region may increase 1.6 percent in 2011, above an earlier forecast of 1.5 percent growth, the Brussels-based European Commission said in a report published today. Inflation will average 2.2 percent this year, the agency forecast, up from a November estimate of 1.8 percent. Spanish and Italian bonds rose. The yield on Spain’s 10- year bonds fell 5 basis points to 5.34 percent, a nine-day low. Italy’s 10-year yield fell three basis points to 4.81 percent, the least in a week. “Of the peripherals, investors seem to be holding the most faith in Spain and Italy at the moment,” said Eric Wand, a rates strategist at Lloyds Bank Corporate Markets in London. “When risk appetite comes back, they tend to benefit.” Rate Bets Austria sold 660 million euros of bonds maturing in April 2022 at an average yield of 3.647 percent, compared with 3.685 percent when it last sold the securities in January through banks. It also issued 660 million euros of 2015 notes at an average yield of 2.514 percent, compared with 1.816 percent in a November sale. Belgium sold three- and six-month Treasury bills, and Malta auctioned 91-day bills. Three-month Euribor futures fell, pushing the implied yield up two basis points to 1.96 percent. The rate has risen from 1.33 percent at the end of 2010, as traders added to bets that the ECB will boost borrowing costs. The Frankfurt-based central bank holds its next policy meeting on March 3. It has kept its key interest rate at a record low of 1 percent since May 2009 and is forecast to leave it unchanged this month, according to all 53 economists surveyed by Bloomberg News. Coalition Talks ECB governing council member Mario Draghi said on Feb. 26 that inflation pressures are forcing policy makers to focus more on the timing of interest-rate increases. Ireland’s 10-year bond yields were four basis points higher at 9.38 percent. Enda Kenny, leader of Ireland’s Fine Gael party, is starting talks on forming a new government after elections ejected the ruling Fianna Fail party. Kenny said he will seek to lower the 5.8 percent interest rate on the country’s aid loans from the European Union and the International Monetary Fund. German government bonds handed investors a loss of 1.3 percent this year, compared with 0.1 percent for U.S. Treasuries and 1.2 percent for U.K. gilts, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

Source