German Bunds Fall on EU Debt-Plan Optimism; Italian Bonds Drop
German 10-year bonds fell this week as growing optimism Europe will contain its debt crisis fueled an advance in stocks, crimping demand for safer assets.
Italian two-year yields surged by the most in almost seven weeks after the nation’s borrowing costs rose at an auction. The Stoxx Europe 600 Index rose 4.2 percent in the period. Europe’s most highly rated debt securities dropped on Oct. 27 after euro- area leaders said bondholders will take 50 percent losses on Greek debt and pledged to boost the region’s rescue fund to 1 trillion euros ($1.4 trillion). Two-year German notes headed for their first monthly drop since June.
“In the quarters to come markets may gain more confidence in the politicians’ abilities to manage this crisis,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “On a longer-term horizon, I wouldn’t be surprised if we see a bit less of safe-haven flows.”
The German 10-year yield climbed nine basis points, or 0.09 percentage point, in the five days to 2.20 percent at 4:35 p.m. London time yesterday. The 2.25 percent bund due September 2021 fell 0.81, or 8.10 euros per 1,000-euro face amount, to 100.46. The yield has risen from a record low 1.64 percent on Sept. 23.
The two-year rate was at 0.61 percent, from 0.66 percent on Oct. 21. The yield fell below 0.50 percent for the first time in about three weeks before the start of the summit on Oct. 26.
Retail Sales
Bunds may extend their decline next week on speculation that a report will show retail sales in Germany gained in September, easing concern that the economy will slip into a recession. Sales, adjusted for inflation and seasonal swings, rose by 1 percent from August, when they slumped 2.7 percent, the Federal Statistics Office in Wiesbaden will say on Oct. 31, according to the median prediction of 24 economists surveyed by Bloomberg News.
The European Central Bank will keep its main interest rate at 1.50 percent on Nov. 3, according to the median forecast of 54 analysts surveyed by Bloomberg. That will be the first meeting presided over by the ECB’s next president, Mario Draghi, who will succeed Jean-Claude Trichet.
Bond Returns
German bonds lost 1.5 percent this month through Oct. 27, according to Bank of America Merrill Lynch indexes, partly reflecting investor confidence that Europe’s leaders are coming to grips with the debt crisis. That has cut their gain since June 30 to 6.3 percent. Italian debt lost 0.9 percent since the end of September, even as the ECB was said to be purchasing the securities.
“The EU summit can be a step forward for solving the euro crisis,” said Alessandro Giansanti, a senior interest-rates strategist at ING Groep NV in Amsterdam. “Receding expectation of another recession in the developed markets is pushing risky assets higher” and bunds lower.
Italy’s 10-year yield jumped 14 basis points this week to 6.03 percent, while that on similar-maturity Spanish paper was three basis points higher at 5.51 percent. The Italian two-year note yield rose yesterday by as much as 33 basis points, the most since Sept. 12.
To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net;
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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