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 securities snapped a run of four straight declines, while Italian and Greek notes slid. Economists predict a report today will confirm the inflation rate in the 17-nation euro region slowed to 2.5 percent in July from 2.7 percent the prior month, according to a Bloomberg News survey. Germany will sell as much as 7 billion euros ($10 billion) of debt maturing in September 2013, while Portugal is scheduled to auction 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 four basis points to 2.28 percent at 8:03 a.m. in London. The 3.25 percent security due in July 2021 gained 0.39, or 3.90 euros per 1,000-euro face amount, to 108.46. Yields on 30-year bonds dropped five basis points to 3.16 percent. 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. Italian two-year notes fell, pushing the yield up five basis points to 3.45 percent. The yield on similar-maturity Greek notes jumped 71 basis points to 35.15 percent. The difference in yield between Italian 10-year bonds and benchmark German bonds increased six basis points to 273 basis points, and the yield spread between bunds and Spanish securities widened four basis points to 271 basis points. German government bonds handed investors a 4.4 percent returned 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. 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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