German Bond Yields Near Two-Week Low on U.S. Rating Downgrade Speculation

German bond yields were near the lowest in over two weeks amid concern a compromise deal on the U.S. debt ceiling won’t prevent a credit-rating downgrade of the world’s largest economy.

Spanish and Italian bonds pared gains as the U.S. House of Representatives prepared to vote on a deal to raise the debt limit by at least $2.1 trillion and slash government spending by $2.4 trillion or more. European unemployment and manufacturing reports cast doubt on the strength of the 17-member currency region’s economic recovery. The U.S. economy grew at a slower- than-forecast 2.3 percent pace in the second quarter, a report showed on July 29.

“I would have expected fixed income to go much lower,” said Glenn Marci, a strategist at DZ Bank AG in Frankfurt. “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.

Ten-year bund yields were little changed at 2.54 percent as of 2:32 p.m. in London, after earlier rising six basis points to 2.59 percent. The 3.25 percent security maturing in July 2021 traded at 106.11. Yields on two-year notes were also little changed, at 1.16 percent.

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 by economic uncertainty after second-quarter growth missed estimates last week and first-quarter GDP was revised down.

Europe Unemployment

European manufacturing growth weakened for a third month in July, data today showed, adding to signs that the region’s economy is losing momentum. A manufacturing gauge based on a survey of purchasing managers in the 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.

Spanish and Italian 10-year bonds rose relative to benchmark bunds for the first time in four days. The yield on 10-year Spanish bonds fell five basis points to 6.03 percent, reducing the additional yield investors demand to hold the securities instead of similar-maturity German bunds by five basis points to 349 basis points.

Debt Auctions

Italy’s 10-year yield slipped five basis points to 5.82 percent as the unemployment rate fell to near a two-year low. The Italian-German yield spread narrowed by six basis points to 327 basis points.

Portuguese bonds declined, pushing the two-year note yield six basis points higher to 14.64 percent. Similar-maturity Irish yields gained 11 basis points to 14.48 percent.

France auctioned 8.5 billion euros of 84-, 175- and 357-day bills. The Netherlands sold 2.46 billion euros 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.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net Paul Dobson in London at pdobson2@bloomberg.net

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

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