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Bund Yield Near Record Low on Concern Euro Region's Debt Crisis May Spread

German 10-year bond yields held near a record low as concern the euro-region’s debt crisis may spread boosted demand for the perceived safety of the 16-nation currency’s benchmark securities.

Bunds advanced for a fourth day as equities continued their descent after a U.S. labor market report disappointed investors last week and a Hungarian official’s June 4 comments suggested a debt default was possible. Demand at an auction of 10-year Belgian debt today fell from the previous sale of the securities in February.

“Bunds continue to benefit from flight-to-quality demand,” said Orlando Green, an interest-rates strategist at Credit Agricole Corporate & Investment Bank in London. “The sentiment is quite gloomy and there’s still a threat to the global recovery.”

The yield on the 10-year bund, Europe’s benchmark government security, declined two basis points to 2.56 percent as of 4:18 p.m. in London. It fell to 2.54 percent according to Bloomberg generic data, the lowest since at least 1989. The 3 percent security due July 2020 rose 0.17, or 1.7 euros per 1,000-euro ($1,194) face amount, to 103.85. The two-year note yield dropped one basis point to 0.49 percent.

Bunds pared gains as a report showed German factory orders rose 2.8 percent in April, versus analysts’ forecast for a decline.

Concern that the European sovereign-debt crisis may spread from Greece to other countries and prompt nations to default has underpinned demand for German securities. Almost a month ago, the European Union unveiled a rescue package of as much as 750 billion euros and the European Central Bank said it would purchase government and private bonds to end the crisis.

Belgian Auction

Belgium sold a total 3.2 billion euros of bonds due in 2012, 2016 and 2020. Investors bid for 3.12 times the amount of the 2-year notes on offer, according to the Belgian Debt Agency. The so-called bid-to-cover ratio for the 10-year bond was 1.40, less than the 1.80 cover at the previous auction of the security on Feb. 22.

“It was a pretty difficult auction,” said Huw Worthington, a fixed-income strategist at Barclays Capital in London. “The bonds underperformed going into the supply and underperformed afterwards. It wasn’t a particularly good supply event.”

Investors demanded an extra 104 basis points, or 1.04 percentage point, in yield to hold Belgian 10-year securities instead of bunds, up from 49 basis points a week ago. That’s the widest spread since March 2009.

Belgian, Spanish Yields

Belgian 10-year bonds fell for a fifth day, driving the yield nine basis points higher to 3.59 percent. French 10-year securities also declined, with the yield rising three basis points to 3.04 percent. The Spanish 10-year yield increased eight basis points to 4.64 percent, the Irish yield rose five basis points to 5.27 percent and the yield on Portuguese securities gained four basis points to 5.27 percent.

French 10-year bond yields also widened versus their German counterparts. The yield difference, or spread, between French 10-year debt and German bonds gained six basis points to 49 basis points, the most since April 2009.

The ECB reduced its government bond purchases last week, a market notice showed today. The Frankfurt-based central bank said it will take term deposits tomorrow to absorb 40.5 billion euros of bond purchases settled up to June 4. That indicates it bought 5.5 billion euros of bonds in the fourth week of its program, down from 8.5 billion euros in the third week, 10 billion euros in the second and 16.5 billion euros in the first.

Spread Widening

“The ECB has been less active, and this has recently allowed spread widening in peripherals,” Credit Agricole CIB’s Green said.

The Netherlands will sell up to 4 billion euros of a 1.75 percent Dutch State Loan due 2013 tomorrow, while Austria plans to sell a total of up to 1.65 billion euros of securities maturing in 2018 and 2021.

Austrian bonds cheapened before tomorrow’s auctions, with the 10-year yield rising 12 basis points to 3.38 percent, the highest since May 10.

“Auction concession is the main reason for the cheapening, but concerns over Austria’s exposure to Hungary also contributed to the move,” Green said.

Bunds have returned 6.9 percent this year, compared with 4.6 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Belgian debt rose 3.4 percent and French securities increased 5.6 percent, the indexes show.

Greek bonds declined 11 percent, Portuguese securities dropped 3.4 percent, and Spanish debt fell 2.7 percent. Irish securities gained less than 1 percent, while Austrian debt returned 6.2 percent, according to the indexes.

To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net

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