German Government Bonds Rise on Concern Europe Economic Recovery to Stall
German government bonds rose after the Bank of Japan said “uncertainty” about the U.S. economy is growing, fueling concern that Europe’s economic recovery will stall as the global outlook worsens.
German bonds are headed for their best monthly returns in almost two years. The European Central Bank is likely to extend emergency aid for the region’s banking industry into next year, the Financial Times said, without saying where it obtained the information. Italian 10-year bonds trailed benchmark German bunds as the government sold more than 10 billion euros ($12.7 billion) of securities maturing between 2013 and 2021.
“The big story at the moment is the concern that not only the U.S. is facing a double-dip probability, but this might eventually spill over into Europe,” said Michael Leister, a fixed-income analyst at WestLB AG in Dusseldorf, Germany. “There’s still performance potential for bunds.”
The yield on the two-year security declined 5 basis points to 0.59 percent as of 4:03 p.m. in London. The 0.75 percent security due September 2012 rose 0.10, or 10 euro cents per 1,000-euro face amount, to 100.33. Ten-year yields fell 6 basis points to 2.14 percent. The bund yield fell to a record low of 2.09 percent on Aug. 25.
German government bonds have returned 3.4 percent to investors this month, the most since November 2008 at the height of the financial crisis, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. U.S. Treasuries returned 1.2 percent, while U.K. gilts earned 4.1 percent.
Japanese Stimulus
Bunds and Treasuries rose today after the Bank of Japan expanded a bank-loan program, highlighting concern the global expansion is slowing.
“Uncertainty about the future, especially for the U.S. economy, has heightened more than before,” the central bank said.
U.S. gross domestic product is expanding at a slower pace because of weaker global growth, domestic policy uncertainty and a lessening of economic stimulus, Morgan Stanley said in an e- mailed note to clients. Morgan Stanley revised its forecast for second-half U.S. growth to a range of 2 percent to 2.5 percent, from an earlier estimate of 3 percent to 3.5 percent.
“Over the week, the U.S. data will support the outlook for a softening economy,” analysts including Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan, wrote in a client note.
German bonds stayed stronger even as European confidence in the economic outlook improved to the highest in more than two years this month. An index of executive and consumer sentiment in the 16 euro nations rose to 101.8 from a revised 101.1 in July, the European Commission in Brussels said in an e-mailed statement today. That’s the highest since March 2008 and exceeded economists’ forecast for an increase to 101.6, based on the median of 28 estimates in a Bloomberg News survey.
Italian, Spanish Auctions
Italy’s 10-year bond yield was little changed at 3.8 percent, leaving the extra yield investors demand to hold the securities instead of bunds at 166 basis points, the most since June 8.
The government sold 5 billion euros of bonds maturing in 2021 at an average yield of 3.81 percent. It also sold 2.86 billion euros of notes maturing in three years, as well as 2.46 billion euros of 2015 paper.
European governments are scheduled to sell about 14 billion euros of debt this week, according to Padhraic Garvey, head of developed-markets strategy at ING Groep NV in Amsterdam.
Spanish bonds declined, pushing the 10-year yield up by 1 basis point to 4.10 percent, as the government said it plans to sell as much as 4 billion euros of 2015 bonds on Sept. 2.
Irish Spread Widens
The notes rose earlier after a government report showed the inflation rate fell in August. Prime Minister Jose Luis Rodriguez Zapatero also said he’s “confident” the government will be able to reach an agreement with opposition lawmakers in order to get the 2011 budget approved.
Consumer prices based on a European Union measure rose 1.8 percent from a year earlier after a 1.9 percent increase in July, the Madrid-based National Statistics Institute said in an e-mailed statement today. The figure was in line with the median forecast from a Bloomberg News survey of seven economists.
Spain’s budget will demand a “certain effort” from the wealthiest, even as no major changes to the tax code are planned, Zapatero told reporters in Shanghai today.
The yield spread between Irish 10-year bonds and similar- maturity bunds widened to 352 basis points, the most since at least 1991, when Bloomberg started tracking the securities. Standard & Poor’s cut the country’s credit rating last week to AA-, the lowest since 1995.
To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
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