Bunds Rise as Concerns About Banks' Problems Spur Demand for Safest Assets
German 10-year notes advanced for a second day as concern some European banks are struggling to overcome the region’s debt crisis boosted demand for the perceived safety of benchmark government debt.
The gains pushed the 10-year bund yield down by the most in almost two weeks after the Wall Street Journal said European stress tests of major banks understated some lenders’ holdings of potentially risky government debt. German factory orders unexpectedly slid in July, indicating the recovery of Europe’s largest economy may be faltering. The MSCI World Index of shares fell for the first time in five days, declining 1 percent.
“Concern over the financial health of euro-region banks has lifted risk aversion,” said Peter Chatwell, an interest- rate strategist at Credit Agricole SA in London. That’s “giving bunds a safe-haven bid,” he said.
The yield on the 10-year bund, Europe’s benchmark security, fell 7 basis points to 2.26 percent at 4:34 p.m. in London. The 2.25 percent security maturing in September 2020 rose 0.65, or 6.5 euros per 1,000-euro ($1,271) face amount, to 99.90.
The yield on the two-year note fell 6 basis points to 0.56 percent.
Bunds stayed higher after the German Economy Ministry in Berlin said factory orders fell 2.2 percent in July after surging a revised 3.6 percent in the previous month. That’s the biggest decline since February 2009. Economists had forecast a 0.5 percent increase, according to the median of 40 estimates in a Bloomberg News survey.
Government Debt Rally
Concern that some European nations won’t be able to repay their loans sparked a rally in government debt that sent the bund yield to a record low 2.087 percent on Aug. 31. German bonds have returned 8.9 percent this year, compared with a 7.8 percent gain for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts’ Societies.
Some European banks excluded certain nations’ debt from totals in stress tests, while others reduced amounts to account for short positions, according to a report on the Journal’s website. The European Union has tested 91 lenders, giving 84 of them passing grades.
The Association of German Banks said yesterday the nation’s 10 biggest lenders may need about 105 billion euros in fresh capital, which may impair the economic recovery by limiting the banks’ ability to lend.
Stress Tests
“The Wall Street Journal article questions the stress tests and the implications of those tests, and that’s pushed bunds higher,” saidMichael Leister, a fixed-income analyst at WestLB AG in Dusseldorf, Germany. “The overriding theme is banking sector worries regarding the peripherals.”
Peripheral euro-region bonds retreated relative to benchmark German securities. The extra yield investors demand to hold Spanish 10-year notes compared with German 10-year bonds increased 6 basis points to 180 basis points. The Greek-German 10-year yield spread was 32 basis points wider at 946 basis points, the most since May 7, before the European Central Bank and the European Union unveiled a rescue package for the region worth 750 billion euros.
The yield spread between Belgian 10-year bonds and German bonds rose 6 basis points to 75 basis points after talks to form a Belgian government collapsed yesterday for the second time in a week. That’s the most since July 1, based on closing prices.
Irish Spread
The Irish-German 10-year yield spread widened 30 basis points to 373 basis points, the most on record based on closing prices, according to Bloomberg generic data. The spread between Portuguese and German 10-year bond yields gained 22 basis points to reach 355 basis points, the most since Bloomberg began collecting the data in 1997.
Spanish debt has gained 1.8 percent this year, while Belgian securities have returned 7.2 percent, according to the EFFAS indexes. Greek debt has lost 19 percent, Portuguese bonds dropped 3.8 percent and Irish debt has given up 1.6 percent.
Austria sold 715 million euros of a 4.85 percent bond due in 2026 and 1.21 billion euros of a 4.35 percent security maturing in 2019. Investors bid for 2.43 times the amount of 2026 bonds on offer, up from a bid-to-cover ratio of 1.52 at the previous auction of the same bonds, held May 4. The bid-to-cover for the 2019 debt rose to 2.47, up from 1.38 at the previous auction of the same securities on Sept. 1, 2009.
Italy plans to sell three-year debt denominated in dollars through three banks, according to a banker involved in the syndicated deal. The notes may be priced to yield 115 basis points more than the benchmark mid-swap rate.
Deutsche Bank AG, Morgan Stanley and Goldman Sachs Group Inc. are managing the deal.
Portugal will sell as much as 1.25 billion euros of 2013 and 2021 securities tomorrow, while Germany will offer an additional 6 billion euros of 2012 notes.
To contact the reporter on this story: Keith Jenkins in London at kjenkins3@bloomberg.net
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