German bunds fell the most in a week after the country’s top court backed its participation in the euro-area rescue funds, reducing demand for the region’s safest assets. Greek 10-year bond yields climbed above 20 percent for the first time as finance chiefs from three of the region’s AAA rated countries failed to break a deadlock over Finland’s demands for collateral in return for aiding the nation. Two-year German notes dropped for a second day as European stocks advanced. Portugal sold 854 million euros ($1.2 billion) of 105- day bills. Spanish and Italian bonds gained. “This could have been a hurdle for approval of the European Financial Stability Facility,” said Norbert Aul, a European interest-rates strategist at RBC Capital Markets in London. The German court decision “offers short-term support to peripherals,” he said referring to bonds from the euro-region’s most indebted nations. Ten-year German bund yields climbed six basis points to 1.91 percent at 12:12 p.m. in London, the biggest increase since Aug. 31. They fell to a record 1.824 percent yesterday. The 2.25 percent securities due September 2021 fell 0.575, or 5.75 euros per 1,000-euro face amount, to 103.060. Two-year yields advanced five basis points to 0.48 percent. They dropped to an all-time low 0.417 percent yesterday. The Stoxx Europe 600 Index added 2.2 percent, and the MSCI Asia Pacific Index gained 2.3 percent. Suits Rejected The Federal Constitutional Court in Karlsruhe threw out suits targeting Germany’s share of the 110 billion euros in loans for Greece from euro-region governments and the International Monetary Fund as well as a separate 750 billion- euro rescue fund approved last year to halt the spread of the Greek debt crisis. The court said that the ruling shouldn’t be seen as “blanket” approval for future rescue participation, and the government must seek approval from the Parliament’s budget committee for new guarantees it assumes under the European Financial Stability Facility. Greek 10-year yields increased as much as 27 basis points to 20.08 percent before settling 17 basis points lower at 19.64 percent. The yield difference, or spread, between Greek 10-year bonds and similar-maturity German bunds widened to a record 1,819 basis points, or 18.19 percentage points. Two-year note yields jumped as much as 123 basis points to 53.54 percent. Greek Concern Europe’s leaders are scrambling to forge a deal that balances Finnish demands for Greece to put up collateral without derailing the second rescue aimed at stopping the debt crisis from spreading to global markets. Finnish Prime Minister Jyrki Katainen said his country may not contribute to a second Greek bailout package if demands for collateral in exchange for new loans aren’t met. Such an outcome “remains a possibility,” Katainen told reporters after delivering a speech in Helsinki today. “It depends on the collateral issue.” Spanish Prime Minister Jose Luis Rodriguez Zapatero called on finance ministers from the Group of Seven nations to coordinate stimulus spending and liquidity measures to tackle the financial crisis when they meet in Marseille, France, on Sept. 9. The European Union said a joint mission of officials from the European Commission, European Central Bank and International Monetary Fund, known as the troika, may return to Greece in mid- September. No date has been set, EC spokesman Amadeu Altafaj said. Spanish Bonds “The market is fearful that there might be some larger disagreement between the Greek government” and the troika, “which might prevent the next tranche of aid being paid out,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “The market is seeing the German constitutional court ruling as opening the way for Germany to continue on its path of rescuing the euro, so there’s some relief.” Spain’s 10-year bond yields fell 10 basis points to 5.09 percent. Two-year rates also dropped 10 basis points, to 3.56 percent. Italy’s 10-year bond yields declined 15 basis points to 5.35 percent, while two-year yields dropped 10 basis points to 4.10 percent. Spanish bonds rallied yesterday as the ECB bought the nation’s debt. ECB Purchases The Frankfurt-based central bank began buying Spanish and Italian debt on Aug. 8 to curtail a surge in yields as contagion from the debt crisis that engulfed Greece, Ireland and Portugal infected the euro region’s third- and fourth-largest economies. Portuguese government debt agency, the IGCP, said it sold 105-day bills at an average yield of 4.959 percent. Investors bid for 2.2 times the amount of securities on offer. That compares with a bid-to-cover ratio of 2.6 at a previous auction of similar-maturity bills on Aug. 3, which were sold at 4.967 percent. Portugal’s two-year note snapped three days of declines, pushing the yield down four basis points to 14.36 percent, while the 10-year yield added as much as six basis points to 10.92 percent, the highest level since Aug. 30. German 10-year yields have declined more than 1 percentage point in the past three months as a slump in shares around the world and concern Europe’s debt crisis will intensify, increased demand for the nation’s debt. A report showed German industrial production rose 4 percent in July, after falling 1 percent in June. Economists had predicted a 0.5 percent increase, according to the median of 37 estimates in a Bloomberg News survey. Bunds have returned 7.4 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Treasuries gained 8.4 percent, Italian debt lost 2.7 percent, Spanish bonds returned 4.3 percent and Greek bonds lost 28 percent, the indexes show. To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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