German bunds rose after Chancellor Angela Merkel and French President Nicolas Sarkozy rejected an increase to the euro-area’s rescue fund and rebuffed calls for joint regional borrowing to stem the debt crisis. Ten-year German bonds advanced for a third day and 30-year debt snapped a run of four declines, while Greek notes slid and Italian bonds were little changed. The European Union’s statistics office said the inflation rate in the region slowed to 2.5 percent in July from 2.7 percent the prior month, as forecast by the median estimate in a Bloomberg News survey. Germany sold 5.62 billion euros ($8.1 billion) of debt due in September 2013, while Portugal auctioned bills. “If they had hinted at the introduction of euro bonds, that would have been a negative” for bunds, said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “They understand that would not be an appropriate solution because it would put the ratings of the stronger countries at risk. The market is taking this as a reason to buy into the core, particularly bunds.” Ten-year bund yields fell six basis points to 2.27 percent at 11:02 a.m. in London. The 3.25 percent security due in July 2021 gained 0.54, or 5.4 euros per 1,000-euro face amount, to 108.61. Yields on 30-year bonds dropped four basis points to 3.16 percent. The euro weakened 1.2 percent versus the Swiss franc. Euribor futures rose, pushing the implied yield on the June 2012 contract down two basis points to 1.13 percent, signaling traders were adding to bets for lower borrowing costs. Italian Notes The leaders of Europe’s two biggest economies agreed yesterday to press for closer euro-area cooperation, tougher deficit rules and a harmonization of their corporate tax rates, while ruling out an expansion of the European Financial Stability Facility. Their plan to resubmit a financial- transaction tax, which the European Union rejected in 2010, sent stocks lower in New York trading. “Many people were expecting something more specific and far reaching,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “The initial reaction has been lower yields in the core and a bit of spread widening. There’s a bit of disappointment about the outcome.” Italian two-year yields were at 3.40 percent. The spread between Italian and German 10-year yields increased seven basis points to 274 basis points, and that between bunds and Spanish securities widened five basis points to 272 basis points. The French-German spread was little changed at 65 basis points. Greek Bonds The yield on five-year Greek notes jumped 12 basis points to 18.42 percent. The five-year yield has climbed from as low as 15.67 percent on July 22, a day after euro area nations agreed on a second bailout plan for the beleaguered nation. The price of the securities was at 54.61 percent of face amount. The Institute of International Finance estimates investors would lose 21 percent under a debt-swap plan proposed for Greece. Germany sold the 0.75 percent two-year notes for an average yield of 0.73 percent, after offering as much as 7 billion euros of the securities for sale. The auction attracted bids for 1.4 times the amount of securities sold. Germany last sold two-year notes on July 6 for an average yield of 1.55 percent, raising 3.4 billion euros and drawing bids for 2.26 times the amount sold. In the seven prior auctions this year, it paid an average 1.56 percent for two-year notes. Portugal Auction Portugal sold 172 million euros of bills due in February at an average yield of 4.989 percent, the debt agency said. That compares with a yield of 4.960 percent at a six-month auction on July 20. The government also auctioned 985 million euros of bills maturing in November at an average yield of 4.854 percent, down from a yield of 4.967 percent on Aug. 3. German government bonds handed investors a 4.4 percent return this year, compared with 7 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds have gained 5.3 percent, while Italian debt earned 0.6 percent. Portuguese securities lost 16 percent, the indexes show. To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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