BLBG:German Bunds Rise Amid Euro-Area Discord as Italy’s Bonds Slide
German 10-year bonds rose, with yields dropping to the lowest in more than a week, as discord among European leaders over ways to bring an end to the debt crisis boosted demand for the region’s safest assets.
Bunds extended their rally from last week, when the yield dropped the most in a month, as a report showed German business confidence unexpectedly declined in September. Italian bonds fell after German Chancellor Angela Merkel and French President Francois Hollande clashed two days ago over a timetable for starting joint oversight of Europe’s banks. Dutch 30-year bonds declined after the government revised some rules for pension funds’ liabilities.
“Any time anyone with different priorities starts to get together and really drill down to what needs to be done, you end up with these differences of opinion,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “The bund remains the intra-euro-zone safe-haven asset of choice.”
Germany’s 10-year yield fell three basis points, or 0.03 percentage point, to 1.57 percent at 12:56 p.m. London time after declining to 1.55 percent, the lowest since Sept. 13. The 1.5 percent bond due in September 2022 rose 0.245, or 2.45 euros per 1,000-euro ($1,292) face amount, to 99.365. The rate dropped 11 basis points last week.
Merrill Lynch’s year-end forecast is for the 10-year yield to fall to 1.50 percent, Wraith said.
Banking Union
Germany’s two-year note yield was little changed at 0.05 percent. The yield difference, or spread, between German two- and 10-year securities narrowed to as little as 151 basis points. That’s the least since Sept. 14, according to data compiled by Bloomberg.
Merkel and Hollande differed on a planned banking union meant to contain the debt crisis at a meeting in Ludwigsburg, Germany. The sooner it’s achieved, the better, Hollande said, while Merkel said it’s more important to ensure the plan is thorough.
Spanish Prime Minister Mariano Rajoy must stop prevaricating and decide whether his nation needs a full rescue, according to Michael Meister, the chief whip and finance spokesman for Merkel’s Christian Democratic Union.
“He must spell out what the situation is,” Meister said in a Bloomberg Television interview in Berlin today. The fact he’s not doing so shows “Rajoy evidently has a communications problem. If he needs help he must say so.”
Spain’s 10-year yield was little changed at 5.76 percent.
Business Confidence
The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, dropped to 101.4 from 102.3 in August. That’s the lowest since February 2010. Economists predicted an increase to 102.5, according to a Bloomberg News survey.
Italy’s two-year yield climbed five basis points to 2.27 percent, while the nation’s 10-year yield increased four basis points to 5.09 percent.
Dutch 30-year bond yields climbed to the most relative to 10-year securities since March 2004 after the government and central bank said pension funds can change the way they calculate liabilities over 20 to 60 years. The 30-year bond yield rose two basis points to 2.60 percent, boosting the spread to 10-year securities to 74 basis points.
“The steepening should continue, as the rule change removes the pressure to hedge very long-term liabilities,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris, referring to higher yields for longer- maturity debt.
Belgium sold 3.01 billion euros of bonds maturing between 2017 and 2022 today, while Germany sold 1.17 billion euros of one-year debt. France is also due to auction bills today.
Volatility on German bonds was the highest in euro-area markets today, followed by Ireland, according to measures of 10- year or equivalent-maturity debt, the spread between two-year and 10-year securities and credit-default swaps.
German bonds returned 2.4 percent this year through Sept. 21, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities gained 1.6 percent, while Italy’s rose 15 percent.
To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
