German Bunds Decline as ECB Provides Dollars to Banks; Greek Bonds Surge

German two-year notes slid for a fourth day as the European Central Bank said it will lend dollars to euro-region banks to ensure they have enough of the U.S. currency, damping demand for safer assets.

Ten-year bund yields climbed above 2 percent for the first time since Sept. 5 as stocks gained after French President Nicolas Sarkozy and German Chancellor Angela Merkel said yesterday they’re “convinced” Greece will remain in the currency union. Greek bonds surged as investors trimmed bets the nation will default. Spain’s 10-year yields approached a one- month high after the country sold 3.95 billion euros ($5.4 billion) of debt.

“It shows that the central banks are being preemptive with respect to the dollar-funding situation,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “This is supportive for the financial sector and calms some of the tensions,” reducing demand for bunds, he said.

Two-year German yields increased five basis points to 0.61 percent as of 3:55 p.m. in London. The 0.75 percent security due in 2013 fell 0.100, or 1 euro per $1,000 euro ($1,388) face amount, to 100.270. Ten-year rates rose six basis points to 1.94 percent, after reaching 2.002 percent.

The ECB said it will conduct three U.S. dollar liquidity- providing operations in coordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank. European stocks and the euro rallied. It will offer the loans on Oct. 12, Nov. 9 and Dec. 7.

All-Time Low

German 10-year yields have dropped more than 90 basis points in the past three months, touching an all-time low 1.68 percent on Sept. 13, as investors sought the relative safety of top-rated government securities on signs the European debt crisis was deepening.

Sarkozy and Merkel signaled they’re ready to keep supporting Greece following a telephone discussion with Greek Prime Minister George Papandreou yesterday. Papandreou committed to meet deficit-reduction targets demanded as a condition for further bailouts, according to the statements distributed by the governments in Athens, Berlin and Paris.

The Stoxx Europe 600 Index advanced 2 percent and the euro strengthened 0.7 percent to $1.3857.

Greek two-year note yields dropped 11.17 percentage points to 63.32 percent after the nation said in a statement it was “determined” to meet all its commitments.

Joaquin Almunia, vice president of the European Commission, said Europe’s leaders will implement the Greek bailout plan they adopted in July, along with the necessary logistical details, to ease financial-market tensions.

Spain Sale

Spain sold about 1.5 billion euros of 4.85 percent bonds due in October 2020 at an average yield of 5.156 percent, compared with 5.20 percent at the previous auction of the same securities on Feb. 17. Demand increased to 1.99 times the amount on offer from 1.54 times.

“The auction results were pretty decent,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The average yield is close enough to the 5 percent level not to concern the market about the level Spain is funding at. All these bonds were taps of lines which it seemed the ECB had been buying.”

Spanish 10-year yields increased four basis points to 5.40 percent after reaching 5.44 percent, matching the highest since Aug. 8. Two-year yields were little changed at 3.75 percent.

ECB Buying

The ECB began purchasing Spanish and Italian bonds on Aug. 8 to curb a surge in yields, according to people with knowledge of the transactions, who declined to be identified because the deals are confidential.

France sold 2.34 billion euros of 2 percent notes due in September 2013 at an average yield of 1.08 percent, down from 1.60 percent at the prior auction on July 21. Investors bid for 2.66 times the amount on offer, compared with 2.78 at the previous sale. The nation also sold debt due in 2014 and 2016, and inflation-linked bonds.

German government bonds have returned 7.4 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Greek bonds lost 43 percent and Spain’s debt gained 3.5 percent.

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

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

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