Bunds Climb on U.S. Easing Speculation; Greek Bonds Advance

German 10-year bonds rose for the first time in three days as stock losses and speculation the Federal Reserve and Bank of England may soon expand asset purchases boosted demand for government securities.

Greece’s bonds beat other peripheral debt as its government forecast budget deficits will fall this year and next year. The extra yield investors demand for holding Greek debt instead of German bunds fell for a seventh day, the longest stretch since July last year. Brian Sack, the Federal Reserve Bank of New York’s markets group chief, said a further expansion of the central bank’s balance sheet would help stimulate an economic recovery that is forecast to be “relatively tepid.”

“Bunds are helped by the probability that the Fed and the Bank of England may soon resume their quantitative-easing programs,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks and money managers. “I don’t expect a strong rally from here given yields are already at extreme levels.”

The 10-year bund yield fell 3 basis points, or 0.03 percentage points, to 2.26 percent at 4:27 p.m. in London. The price of the 2.25 percent security maturing in September 2020 rose 0.28, or 2.8 euros per 1,000-euro ($1,372) face amount, to 99.96. The 2-year yield slipped 2 basis points to 0.84 percent.

Greece’s Bonds

Greece’s bonds stayed higher after the government forecast its budget deficit as a percentage of gross domestic product will fall to 7.8 percent this year and to 7 percent next year from 13.6 percent in 2009.

Prime Minister George Papandreou, elected a year ago today, is trying to show investors that Greece can stay the course of a deficit-cutting drive that has slashed wages and pensions and led to street protests. Greece is seeking to return to bond markets next year after investor concern that the country would default on 300 billion euros of debt led to a surge in borrowing costs and prompted the EU-led rescue.

“It’s a very challenging budget,” said Nicholas Magginas, an economist at National Bank of Greece SA, the country’s largest lender. “It is increasingly likely that a less optimistic projection for revenue will be adopted. There will also be pressure to even that out with more spending cuts.”

Irish bonds extended gains even after the country’s central bank cut its forecast for economic growth this year and next.

Peripheral Debt

The European Central Bank stepped up its government bond purchases last week, buying the most in more than three months to calm bond markets. The Frankfurt-based central bank said it bought 1.38 billion euros of bonds last week, up from 134 million euros the previous week.

The yield on 10-year Greek securities fell 15 basis points to 10 percent, while the Irish yield declined 18 basis points to 6.27 percent. The Spanish bond yield of the same maturity declined 4 basis points to 4.05 percent.

The difference in yield between 10-year Greek bonds and German bunds fell to 775 basis points from 785 basis points last week after Chinese Prime Minister Wen Jiabao told Greek lawmakers in Athens yesterday that China supports a stable euro and won’t reduce its holdings of European bonds.

Greek bonds gained almost 5 percent in the third quarter, the first positive return since the third quarter of 2009. The gain beat a 2 percent return from German debt during the same period, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Further Action

Fed policy makers are now debating how to deploy tools for more unconventional easing.

“Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long,” New York Fed President William Dudley said last week.

Dudley estimated that $500 billion of purchases would add as much stimulus as reducing the Fed’s benchmark rate by 0.5 percentage point to 0.75 percentage point, depending on how long investors expect the Fed to hold the assets. The Fed has kept the target rate for overnight loans at a record-low range of zero to 0.25 percent since December 2008.

Further gains in German bonds may be limited ahead of bond sales on Oct. 6. Germany plans to sell as much as 5 billion euros of notes maturing in 2012 and one billion euros of 10-year inflation-protected debt. France will sell bonds maturing in 2020, 2026 and 2029 on Oct. 7.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Stephen Morris in London at smorris39@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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