German 10-year government bonds declined, set for a weekly drop, as stock-market gains boosted demand for higher-yielding assets and European Union leaders met to seek a solution to the region’s debt crisis. Declines in Portuguese bonds pushed the 10-year yield to a euro-era record after Standard & Poor’s cut the nation’s credit rating late yesterday. President Anibal Cavaco Silva is meeting political parties to discuss Prime Minister Jose Socrates’s resignation. European loan growth accelerated last month, while German business confidence stayed near a record in March, reports showed today, fueling speculation the debt crisis won’t deter policy makers from raising interest rates next month. “We’re seeing a reduction in risk aversion, and that’s why yields are heading higher,” said Karsten Linowsky, a fixed- income strategist at Credit Suisse Group AG in Zurich. “The fundamental economic picture is solid. The direction of yields is likely to be upward.” The German 10-year bund yield increased two basis points to 3.26 percent at 12:35 p.m. in London, while yields on two-year notes were four basis points higher at 1.72 percent. The 10-year yield has increased seven basis points since March 18. Portugal’s 10-year yield advanced as much as 14 basis points to 7.80 percent. The difference in yield investors demand to hold the securities instead of German bunds widened 10 basis points to 452 basis points, the most since November. The Portuguese two-year yield rose as much as 38 basis points to 7.08 percent. It was at 6.96 percent. Yields Surged Yields surged yesterday after Socrates’s resignation stoked concern the country may struggle to repay about 9 billion euros ($12.7 billion) of debt due by June. Fitch Ratings cut the nation’s debt rating to A- from A+ yesterday, and S&P followed with a downgrade to BBB, citing “increased political uncertainty.” Portuguese bonds have lost investors 5 percent this year, compared with a loss of 1.8 percent by German government bonds, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Greek bonds have lost 1 percent this month, paring their gain since the end of 2010 to 1.4 percent. Spanish debt has gained 2.95 percent. Socrates’ plans for cutting the budget deficit were rejected by opposition leaders. Cavaco Silva was scheduled to meet in Lisbon this morning with each of the six parties with seats in parliament. European Data Loans to European households and companies rose 2.6 percent from a year earlier after rising an annual 2.4 percent in January, the European Central Bank said today. The rate of growth in M3 money supply, which the ECB uses as a gauge of future inflation, was 2 percent, the highest since August 2009. German business confidence fell less than economists forecast in March. The Munich-based Ifo institute said its business climate index was at 111.1 this month, after climbing to 111.3 in February, the highest reading since records for a reunified Germany began in 1991. Economists expected a drop to 110.5, according to the median of 39 surveyed by Bloomberg News. The European Stability Mechanism will involve bondholders after mid-2013, German Chancellor Angela Merkel told reporters after an EU summit in Brussels, saying it was crucial to Germany to bind in bondholders because taxpayers couldn’t be expected to pay the bill alone in any future crises. To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net Keith Jenkins in London at kjenkins3@bloomberg.net; To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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