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German Two-Year Bonds Gain as Stocks Drop, Hungary Misses Debt Sale Target

German two-year government note yields declined from near their highest in almost three months as stocks fell and Hungary failed to meet its target at a debt sale, stoking demand for the safest fixed-income assets.

Hungary’s borrowing costs rose to a 19-week high at its first offering since international creditors suspended talks with the government. The Stoxx Europe 600 Index slid 0.2 percent and the Standard & Poor’s 500 index fell 0.7 percent. Irish and Greek 10-year yields dropped relative to those on German bunds after demand rose at the so-called peripheral nations’ debt auctions, easing concern they won’t be able to fund their budget deficits.

“Stocks are falling and the Hungarian situation isn’t helping risk appetite, and that’s given a bit of a bid to bunds,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh.

The two-year German yield fell five basis points to 0.79 percent at 3:43 p.m. in London. The 0.5 percent security due June 2012 rose 0.1, or 1 euro per 1,000-euro ($1,289) face amount, to 99.465. The yield rose to 0.84 percent yesterday, the highest since April 28. The 10-year yield fell one basis point to 2.65 percent.

Hungary raised less than targeted for the fourth time since June, selling 35 billion forint ($156 million) of three-month Treasury bills, compared with the 45 billion forint planned, the debt management agency’s Bloomberg page shows. Total bids at the weekly auction were 52.5 billion forint. The average yield was 5.47 percent, the highest since March 2, up from 5.28 percent.

Ireland, Spain

The International Monetary Fund and European Union ended talks with Hungary on July 17 without endorsing the nation’s deficit-control plan. The forint fell to the lowest since April 2009. Central bank President Andras Simor said a “sustained increase” in risk premiums may prompt higher interest rates.

The premium that investors demand to hold 10-year Irish bonds over benchmark German bunds narrowed 7 basis points to 277 basis points, while the Spanish-German yield spread was 6 basis points tighter at 170 basis points. The Greek-German spread narrowed by 7 basis points to 771 basis points.

Today’s sale of Irish and Spanish securities follows auctions by Greece and Portugal last week, which garnered greater demand than anticipated. Ireland’s credit rating was cut one step to Aa2 by Moody’s Investors Service yesterday.

‘Solid Buying’

Spain sold 4.25 billion euros of 12-month bills today at an average yield of 2.221 percent, compared with 2.303 percent at the last sale on June 15. Demand was 1.95 times the amount sold, compared with a bid-to-cover ratio of 1.49 the last time the securities were sold in June. It also sold 1.72 billion euros of 18-month bills at 2.331 percent, compared with 2.837 percent in June. The bid-to-cover ratio was 2.44 compared with 3.51 at a previous sale.

“Demand for Spanish paper has been very strong,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole CIB in London. “We’re seeing solid buying from real money accounts,” Jellinek said in an interview with Bloomberg’s Ken Prewitt on Bloomberg Radio’s “First Word.”

Investor sentiment toward Spanish debt has improved on perceptions that European regulators’ plan to publish the results of bank stress testing this week “will bring clarity,” according to Gianluca Salford, a fixed-income strategist at JPMorgan Chase Bank in London.

Appetite Undiminished

Ireland sold 750 million euros of 4.6 percent 2016 notes at an average yield of 4.5 percent, attracting 3.6 times more bids than securities sold, up from 3.1 times at a previous sale. It also sold 750 million euros of 5 percent 2020 bonds at an average yield of 5.54 percent, with a bid-to-cover ratio of 3, the same as at an earlier auction.

“The market’s appetite for Spanish, Portuguese and Irish debt hasn’t diminished,” said Philip Shaw, chief economist at Investec Securities in London on Bloomberg Radio’s “First Word.”

Demand at the Greek bill sale was 3.85 times the securities offered, compared with a bid-to-cover ratio of 3.64 times at an auction of 26-week securities a week ago, data from the debt agency in Athens showed today. The bills were sold at 4.05 percent. It was the country’s second sale since it received an EU rescue package in May to stave off the threat of default.

“Greek markets are shut beyond around three to six months, and there’s little hope of the Greek government being able to issue longer-term paper for quite some time,” Shaw said. “The Greek authorities are very keen on saying that markets aren’t completely closed for us, and this is their second issue of very short-term paper over the past fortnight.”

German government bonds returned 6.4 percent this year, compared with 6.1 percent for U.S. Treasuries and 6.14 percent for U.K. gilts, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit.

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net.

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