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Irish Government Bonds Fall Versus German Bunds on Concern Gains Overdone
Irish government bonds fell relative to German bunds as investors judged they recovered too quickly this month from declines prompted by concern some European nations would struggle to repay debt.
German 10-year bonds rose on speculation that bond fund managers are adding securities to rebalance their holdings to adjust to changes in indexes they use to measure performance. Italian bonds were little changed after it sold 9.5 billion euros ($12.4 billion) of securities. An index of executive and consumer sentiment in the 16 euro nations rose to 101.3 from 99 in June, the European Commission said, beating the median of 26 economist estimates in a Bloomberg survey.
“There is some profit taking,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “There have been much stronger index extension flows into European bonds this month compared to the U.S.”
Irish 10-year bond yields climbed 4 basis points to 5.1 percent as of 5:25 p.m. in London. That widened the yield difference between the securities and benchmark bunds 10 basis points to 233 basis points, according to generic data compiled by Bloomberg.
Ten-year German yields fell four basis points to 2.71 percent, while two-year yields dropped two basis point to 0.83 percent.
German unemployment fell for a 13th month in July, the Federal Labor Agency in Nuremberg said today. The number of people out of work declined a seasonally adjusted 20,000 to 3.21 million, the lowest since November 2008, and in line with the median estimate before the data was published. The adjusted jobless rate declined to 7.6 percent.
Bond Returns
Irish and Spanish government bonds both returned 3.5 percent this month, the biggest gainers in the euro region, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.K. gilts handed investors a loss of 1.4 percent and German debt 1 percent, the worst returns among the 26 countries tracked in the indexes.
Those trends were helped after only seven of 91 European banks examined by regulators last week failed tests designed to show they can withstand another recession and sovereign-debt crisis. The Committee of European Banking Supervisors said on July 23 the banks that failed had a combined capital shortfall of 3.5 billion euros ($4.5 billion).
“After the release of bank stress tests last week, sovereign spreads have continued tightening,” Marek Sasura, an analyst at Barclays Capital in London, wrote in a research report today.
Italian Spread
German government bonds returned 5.9 percent this year, U.S. Treasuries 6.1 percent, and 4.5 percent for U.K. gilts, the indexes show.
Italian 10-year yields rose two basis points relative to German bunds, for a spread of 125 basis points, as a report showed business confidence in the Mediterranean nation advanced to a two-year high in July. The spread was at 153 basis points at the beginning on July.
The Portuguese-German spread widened seven basis points, to 240 basis points, after narrowing from 297 basis points at the beginning of the month.
Italy priced 3.5 billion euros of three-year bonds to yield 2.01 percent down from 2.33 percent at the previous sale on June 28. Investors bid 1.39 times the amount of the bonds offered, matching the bid-to-cover ratio in June.
Italian Budget
The treasury also sold 3.5 billion euros of 10-year bonds to yield 3.92 percent, compared with a 4.09 percent rate at the previous sale a month ago. The bid-to-cover ratio was 1.33 times, compared with 1.29 in June. The treasury also sold 2.5 billion euros of floating-rate notes due in 2015 that were priced with an average yield of 1.7 percent and had a bid-to- cover ratio of 1.44 times the offer.
Italy’s Chamber of Deputies today voted to give final approval to a two-year budget adjustment aimed at cutting the nations’s budget deficit by 25 billion euros. The spending package aims to lower the deficit below the European Union’s 3 percent of gross domestic product ceiling by the end of 2012.
Standard & Poor’s today said the budget cuts support the country’s A+ rating on long-term debt, according to a statement.
To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net
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