German government bonds snapped two days of losses before a report that analysts forecast will show industrial production in the euro area fell in August, underlining the fragility of the region’s economy. German 10-year yields headed for a weekly drop after the International Monetary Fund this week lowered its forecasts for euro-region growth this year and next. Spanish 10-year bonds rose, erasing a weekly decline, even after Standard & Poor’s cut the nation’s sovereign-debt rating to one level above non- investment grade on Oct. 10. “Economic forecasts are being revised downward,� said Christoph Rieger, head of interest-rate strategy at Commerzbank AG in Frankfurt. “There are event risks which still need to be agreed on, such as when will Spain apply for help.� Ten-year bund yields fell one basis point, or 0.01 percentage point, to 1.49 percent at 9:45 a.m. London time. The 1.5 percent security maturing in September 2022 gained 0.09, or 90 euro cents per 1,000-euro ($1,297) face amount to 100.075. The rate fell to 1.44 percent yesterday, the lowest since Oct. 4, and is poised for a three-basis point decline this week. Factory output in the 17-nation euro area dropped 0.4 percent in August from July, when it rose 0.6 percent, according to the median estimate of 36 economists in a Bloomberg survey. The data comes after the IMF cut its global growth forecasts this week, predicting the euro-area economy will contract 0.4 percent this year, 0.1 percentage point lower than forecast in July, and grow 0.2 percent in 2013, less than the 0.7 percent forecast three months ago. Spain’s 10-year bond yields fell, trimming their weekly increase, after New York-based S&P said Oct. 10 that it had cut the nation’s credit rating two levels to BBB-. The rating company cited euro-region peers’ backtracking on a pledge to sever the link between the sovereign and its banks, as Spain considers requesting external financial assistance. Ten-year Spanish yields were eight basis points lower at 5.69 percent, and are little changed since Oct. 5. Spain wants there to be consensus among European governments on any bailout request before deciding whether to ask for help, Deputy Prime Minister Soraya Saenz de Santamaria said yesterday. A request for aid would trigger the European Central Bank’s government bond-purchase plan, which would see the ECB buying maturities of up to three years in the secondary market. Moody’s Investors Service is studying a possible downgrade for Spain from its current Baa3 level, its lowest investment- grade rank. “We fear that Moody’s cut of Spain’s rating will come before the country’s official request for help,� strategists at Societe Generale SA led by Paris-based Vincent Chaigneau, the global head of interest-rate strategy, wrote in a note to investors. “This calm is not going to last.� German government bonds returned 3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, while Spanish bonds have gained 1.8 percent. To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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