German Bunds Decline as Recovery in Stocks Curbs Demand for Safest Assets

German government bonds declined, pushing the 10-year yield up from the lowest in more than a week, as gains in stocks across Europe sapped demand for the safest assets.

Irish and Portuguese bonds fell as European finance ministers met in Brussels today, a week after agreeing to a $1 trillion package for the region’s most indebted nations. European Central Bank President Jean-Claude Trichet said the euro area needs a “quantum leap” in controls on national budgets. The bund yield rose for the first time in three days as the Euro Stoxx 50 Index added as much as 1.6 percent, after falling 1.1 percent earlier.

“We’re seeing a bit of a reversal, or a pause, in risk aversion and that’s being reflected in the bond yields,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “Sentiment hasn’t really changed, and we would need to see more stability to have a shift” benefiting so-called peripheral bond markets like Portugal, he said.

The 10-year German bund yield rose 1 basis point to 2.87 percent as of 4:35 p.m. in London, after earlier dropping to 2.82 percent, the lowest since May 7. The two-year note yield also rose 1 basis point, to 0.58 percent.

Irish bonds declined for a third day, pushing the 10-year yield up by 6 basis points to 4.78 percent. The Portuguese yield increased 7 basis points to 4.80 percent.

Greek-German Spread

The extra yield investors demand to hold Greek bonds instead of bunds widened 35 basis points to 520 basis points, the highest since officials agreed to the rescue package. That spread had declined to 430 basis points on May 12, after soaring to 965 basis points five days earlier before the support agreement was announced.

“Country spreads have tightened significantly since the package but there’s still some volatility,” said Michiel De Bruin, who helps manage $28 billion of assets as head of euro government bonds at F&C Investments in Amsterdam.

German debt returned 5.1 percent this year, compared with 3.4 percent for U.S. Treasuries and a 9.6 percent loss for Greek bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Bunds yielded 57 basis points less than Treasuries today, compared with 59 basis points on May 14. The spread with U.K. gilts slipped 1 basis point to 88 basis points.

‘Dollar Wins’

“There’s been a decent move from bunds into gilts and I would expect to be similar with Treasuries,” said Peter Chatwell, a strategist at Credit Agricole CIB in London. “Ultimately, the thing which may become the main driver is that bunds lose their safe-haven allure. It’s going to be the dollar that wins out” in that scenario, he said.

Greek bonds slid this year, dragging securities from other so-called peripheral European nations lower amid investor concern that the country would not be able to meet its debt obligations as it struggled to fund its budget deficit.

“There is a need for a quantum leap in the governance of the euro area,” Trichet said in an interview with German news weekly Der Spiegel. “There needs to be major improvements to prevent bad behavior, to ensure effective implementation of the recommendations made by peers and ensure real and effective sanctions in the case of breaches.”

The Frankfurt-based ECB said central banks in the euro area bought 16.5 billion euros ($20.4 billion) worth of government and private bonds last week as part of a bid to stabilize financial markets and safeguard the euro. It will have a quick tender on May 18 to collect one-week fixed term deposits to absorb the money, the bank said in a statement today.

Not ‘an Option’

A restructuring of Greece’s debt isn’t an option, Frankfurter Allgemeine Zeitung cited French Finance Minister Christine Lagarde as saying. Prime Minister George Papandreou this month announced new austerity measures to qualify for 110 billion euros of loans from the European Union and International Monetary Fund.

Slovakia sold 108.5 million euros of securities maturing 2016 today, attracting bids equivalent to 1.2 times the amount on offer, down from a so-called bid-to-cover ratio of 2.78 times in April. Ireland and the Netherlands are scheduled to sell bonds tomorrow. Spain is planning to sell 10-year bonds in three days’ time.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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