German bonds snapped a six-day advance as optimism that U.S. lawmakers will push through a compromise on the debt ceiling and avoid a default led investors to seek higher-yielding assets.
Spanish and Italian 10-year bonds outperformed benchmark bunds for the first time in four days and European stocks rallied as the House of Representatives prepared to vote on a deal to raise the debt limit by at least $2.1 trillion and slash government spending. The yield on the 10-year bund rose from the lowest in more than two weeks even as reports showed euro-area unemployment held at 9.9 percent for a fourth month and manufacturing weakened, casting doubt on the strength of the region’s economic recovery.
The U.S. debt agreement has provided a “general breath of relief” and created a “broader risk-on” environment, said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “Even Italian bonds are being supported.”
Ten-year bund yields advanced four basis points to 2.58 percent as of 11:28 a.m. in London. The 3.25 percent security maturing in July 2021 fell 0.34, or 3.4 euros per 1,000-euro ($1,440) face amount, to 105.815. Yields on two-year notes also rose five basis points, to 1.20 percent.
The Stoxx Europe 600 Index rose 0.7 percent and U.S. government debt declined.
The House plans votes today and the Senate may follow suit to consider the agreement reached during a weekend of negotiations that capped a months-long struggle over raising the $14.3 trillion debt ceiling. Negotiations were spurred after second-quarter growth missed estimates last week.
“I would have expected fixed-income to go much lower,” said Glenn Marci, a strategist at DZ Bank AG in Frankfurt. “Ten-year yields are still below 2.60 percent; that’s not really a sign of relief. The picture for the U.S. is still uncertain, particularly after the GDP numbers, and people are not that willing to return to the U.S.” markets, he said.
Bunds remained lower after data showed European manufacturing growth weakened for a third month in July, adding to signs that the region’s economy is losing momentum. A manufacturing gauge based on a survey of purchasing managers in the 17-nation euro region fell to 50.4 from 52 in June, the lowest reading since October 2009, when it was below 50 for a 16th straight month. A number above 50 indicates expansion.
At 21 percent, Spain had the highest jobless rate in the euro region, while Austria the lowest at 4 percent, said the European Union statistics office in Luxembourg.
The yield on 10-year Spanish bonds fell 10 basis points to 5.98 percent, reducing the additional yield investors demand to hold the securities instead of similar-maturity German bunds by 15 basis points to 339 basis points.
Italy’s 10-year yield slid 13 basis points as the unemployment rate fell to near a two-year low. The Italian- German yield spread narrowed by 15 basis points to 318 basis points.
Portuguese bonds declined, pushing the two-year note yield 17 basis points higher to 14.76 percent. Similar-maturity Irish yields gained 13 basis points to 14.50 percent.
French bonds were little changed before an auction of bills. The Netherlands sold 2.46 billion euro of three-month bills at an average yield of 0.9 percent, six-month bills at 1 percent and nine-month bills at 1.105 percent.
German government bonds handed investors 3 percent this year, compared with 4.3 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds have lost 0.2 percent, while Italian debt has slipped 3.5 percent and Portugal’s has declined 22 percent, the indexes show.
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