German government bonds climbed, snapping a two-day drop, as France backed Germany in refusing to add to the European Union’s 440 billion-euro ($581 billion) rescue fund and rejecting joint euro-area debt securities.
The gains sent 30-year German yields down from the highest in almost seven months. Dutch and Belgian bonds also rose as European Central Bank Governing Council member Nout Wellink yesterday said he doesn’t favor joint bond issuance for the euro region, while the ECB today said emergency liquidity measures will stay “as long as necessary.” Irish bonds were little changed after Fitch Ratings downgraded the nation’s credit.
“What is really moving the market is France backing Germany,” said Matteo Regesta, a fixed-income strategist at BNP Paribas SA in London. “It’s just like the calm before another storm will set in” for high-deficit nations’ bonds, he said.
The 10-year bund yield fell five basis points to 2.96 percent as of 1:30 p.m. in London. The 2.5 percent security maturing in January 2021 rose 0.44, or 4.40 euros per 1,000-euro ($1,321) face amount, to 96.08. The yield on 30-year debt fell eight basis points to 3.40 percent after reaching 3.51 percent yesterday, its highest since May 20.
Dutch 10-year bond yields fell four basis points to 3.16 percent, and similar-maturity Belgian bond yields dropped five basis points to 3.98 percent.
Bunds fell the past two days amid speculation that the euro area’s strongest economies will need to extend further support to weaker nations in the region. Jean-Claude Juncker, prime minister of Luxembourg and leader of the group of euro-area finance ministers, and Giulio Tremonti, finance minister of Italy, wrote in the Financial Times on Dec. 6 that Europe should issue common bonds in response to the sovereign debt crisis.
“Market concerns over core Europe’s credit sharing, funding of the bailouts, and what consequences these may have on any potential loan receiver continue to erode confidence in the euro bond market,” a team of analysts at Nomura International Plc in London led by Nick Firoozye wrote in a client note today.
France backs Germany’s resistance to increasing the size of the European Union bailout fund and to joint euro-area bonds, a French official told reporters today.
Euro bonds are an “implicit transfer of money to other countries,” Wellink, the Dutch central bank chief, told reporters in Frankfurt yesterday. Creating euro bonds would be “a very intransparent way of burden sharing,” he said.
Volker Kauder, who heads the parliamentary party of German Chancellor Angela Merkel’s Christian Democrats, said on German ARD television that European treaties have no provision for a commonly-issued euro bond, and that the nation’s Constitutional Court would block any move to create such securities.
Opportunity to Sell
The Spanish 10-year yield rose four basis points to 5.29 percent. Portuguese yields were little changed at 6.26 percent.
Bonds from so-called peripheral nations rallied last week as traders said the ECB increased purchases of government bonds. The central bank said in its monthly bulletin today that it will keep emergency liquidity measures for as long as needed to help restore bank lending in the 16-member region.
“Any compression” of the yield premium investors demand to hold high-deficit nations’ debt is “an opportunity to sell, unless European officials wake up to their responsibilities,” BNP Paribas’s Regesta said.
Commonly-issued bonds for euro-area member nations may be the best way to pool sovereign risk and show commitment to the European Monetary Union, according to Goldman Sachs Group Inc.
“If all countries, including those with the highest credit quality, are truly committed to the euro, then the e-bond might be an ex-ante optimal risk-sharing scheme,” rate strategist Francesco Garzarelli and economist Natacha Valla wrote in today an e-mailed report.
Investors should sell longer-dated German bonds because the nation’s negotiating position is likely to become “more accommodating,” according to Steven Major, global head of fixed-income research at HSBC Holdings Plc in London.
“Sovereign risk is likely to spread from the problem markets to the ones that have to pay for it,” Major said. “The bottom line is that Germany will have to pay in a muddling- through scenario, and that adds risk premium to bunds.”
Irish 10-year bonds rose, sending the yield five basis points lower to 8.16 percent, even after Fitch cut the nation’s credit ratings to BBB+ from A+. The company said Ireland’s “financing flexibility” is reduced given costs to bail out the nation’s banks.
“Ireland’s sovereign credit profile is no longer consistent with a high investment-grade rating,” Fitch wrote. “Ireland’s continued investment-grade status is underpinned by the EU-International Monetary Fund external support.”
‘Cheap’ Belgian Bonds
Government bond trading flows show there is some appetite for bonds issued by Ireland, Portugal and Italy, reflecting an easing of stresses in those markets, according to ING Groep NV.
“We have seen some reasonable nibbling of peripheral paper from the buyside,” Padhraic Garvey, head of developed-market debt strategy in Amsterdam, wrote in an e-mailed note today. There’s “also some decent interest in Belgian paper, which we now see as quite cheap in the wake of recent weeks of underperformance,” he wrote. “Not big flows, but at least ones that have a more positive tint than that of previous weeks.”
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