German government bonds fell, sending 10-year yields to the highest in six weeks, on speculation European leaders are seeking ways to lower borrowing costs of countries such as Italy and Spain. Spanish bonds rose for a second day, pushing the 10-year rate to less than 7 percent, after French President Francois Hollande said leaders are exploring letting the permanent European rescue fund, called the European Stability Mechanism, buy debt from countries that have taken fiscal consolidation steps, such as Italy. Germany sells as much as 5 billion euros of two-year notes carrying a 0 percent coupon. Negotiations among Greek political parties were set to continue for a third day as they bid to form a government after June 17 elections. “There’s some talk about the ESM buying Spanish and Italian bonds and it looks like it’s going to be discussed at a European level,� said Padhraic Garvey, head of developed debt markets at ING Groep NV in Amsterdam. “That is giving Italy and Spain a short-term boost but it’s only talk at the moment, there’s nothing concrete. Longer-term something much more substantial needs to happen.� German 10-year yields jumped six basis points, or 0.06 percentage point, to 1.59 percent at 10:01 a.m. London time, the most since May 8. The 1.75 percent security due July 2022 declined 0.545, or 5.45 euros per 1,000 euro ($1,270) face amount, to 101.475. The two-year yield rose three basis points to 0.12 percent. German Auction The nation sold 4.6 billion euros of the notes at a record- low yield of 0.07 percent at a sale on May 23. “There are ample fundamental reasons to buy the front end of Germany,� Aman Bansal, a senior associate at Citigroup Inc. in Mumbai, wrote in an e-mailed note yesterday. “Recent measures and election results have failed to placate markets and uncertainty remains high. We expect the auction to clear without any problem.� LCH Clearnet Ltd., Europe’s biggest clearing house, raised the extra deposit it takes from clients to trade most Spanish government bonds yesterday amid concern that euro-area leaders are failing to tame the debt crisis. “We’re looking at the ways and means� to use the ESM, the 17-country euro region’s permanent bailout fund, “at these conditions,� Hollande told reporters after a summit of G-20 leaders in Los Cabos, Mexico. Germany said that no specific plans for Europe’s rescue funds to buy the bonds of euro-area governments were discussed in Mexico. Pimco’s View Ten-year Spanish yields dropped 14 basis points to 6.90 percent, while the rate on similar-maturity Italian debt dropped 10 basis points to 5.82 percent. Pacific Investment Management Co.’s Andrew Bosomworth said the yields of the two European nations are unsustainable. “At these sort of yields, both of those countries will go bankrupt eventually if they have to continually refinance themselves at these sorts of levels,� Bosomworth, a money manager at the Newport Beach, California-based company, said in an interview on Bloomberg Television’s “The Pulse� with Maryam Nemazee. “It’s not an easy environment to invest in.� Volatility on Spanish bonds was the highest in the euro- area markets today followed by Finland’s debt, according to measures of 10-year debt, the spread between two- and 10-year securities and credit-default swaps. The margin needed for Spanish securities due in 10 years to 15 years will be increased to 14.7 percent from 13.6 percent, according to a statement on LCH Clearnet’s website. The rate was also boosted on all Spanish debt due from zero months through seven years. German debt returned 2.5 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 7 percent, and Italian bonds rose 7.2 percent, the indexes showed. To contact the reporters on this story: Lucy Meakin in London at lmeakin1@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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