Bunds Drop on Signs Europe Leaders Tackling Crisis; Italian Bonds Advance

German bunds fell, pushing benchmark 10-year yields to a three-month high, as speculation Europe’s leaders are moving closer to agreeing on measures to combat the debt crisis damped demand for safer assets.

Italian bonds led gains among the securities of heavily indebted euro-area nations after French Budget Minister Valerie Pecresse said greater financial assistance may be available in exchange for tougher budget rules. Belgian bonds advanced as the country sold 2 billion euros ($2.68 billion) of debt following an agreement by political parties on ways to reduce the nation’s budget deficit. Euro-region finance ministers are scheduled to meet tomorrow in Brussels.

“Reports over the weekend suggest there is a discussion about increasing the stability pact within Europe,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich. “That would help the Germans to agree on larger commitments for their euro-region partners. That’s helping risk sentiment,” damping demand for the safest government debt, including German bunds.

The German 10-year yield rose three basis points, or 0.03 percentage point, to 2.30 percent at 4:09 p.m. London time, after climbing to 2.34 percent, the highest since Aug. 16. The 2 percent security due January 2022 fell 0.30, or 3 euros per 1,000-euro face amount, to 97.345.

Italian 10-year bond yields dropped five basis points to 7.21 percent, paring the increase for the month to 112 basis points. It’s still set to be the biggest monthly advance in yields since Bloomberg began collecting the data in 1993. Similar-maturity Spanish yields fell 13 basis points to 6.57 percent today, 103 basis points higher since Oct. 31.

‘Complete Commitment’

After a slide in euro-area government debt last week that pushed Italian and Spanish note yields to euro-era records, Pecresse signaled yesterday more help from the European Central Bank may be feasible to stem crisis contagion.

The Frankfurt-based ECB said it settled 8.6 billion euros of bond purchases under its Securities Market Program in the week through Nov. 25, up from 8 billion euros the previous week. It will take seven-day term deposits tomorrow to absorb the 203.5 billion euros of liquidity created since its bond program started on May 10 last year, a practice it employs to ensure the purchases don’t fuel inflation.

“Countries need to make a complete commitment to cutting their debt levels and increasing budgetary convergence,” Percresse said on France’s Canal Plus television. “Then European institutions will be able to play their full role.”

Treaty Change

German Chancellor Angela Merkel’s chief spokesman, Steffen Seibert, said the nation’s fast-track proposals for European Union treaty change to enforce budget discipline are key to solving the euro-area debt crisis. The nation is working with “an ambitious timeline,” he told reporters in Berlin today.

The euro strengthened from an eight-week low versus the dollar, advancing 1 percent to $1.3369. The Stoxx Europe 600 Index of shares gained 3.8 percent, the most since Sept. 27.

Belgian 10-year yields declined 27 basis points to 5.60 percent, following the sale of securities due between 2018 and 2041. Standard & Poor’s cut the nation’s credit standing one step to AA with a negative outlook on Nov. 25. Coalition talks produced a budget agreement less than 24 hours later.

The nation paid 5.659 percent to sell 10-year securities today, the most since January 2000.

While Italian two-year note yields fell 56 basis points to 7.11 percent, they earlier increased to a record 8.12 percent. The rate has doubled since the start of September, when it was 3.41 percent.

‘Rays of Hope’

“The market has been deeply pessimistic and people are looking for any straw of optimism to grab,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “There are always rays of hope but anybody who has been following this crisis should be careful not to get too optimistic.”

The Rome-based Treasury sold 567 million of inflation- linked bonds due in September 2023 today, less than the 750 million-euro maximum target for the sale.

Italy will sell as much as 8 billion euros of debt maturing in 2014, 2020 and 2022 tomorrow, while Belgium auctions bills. Spain plans to sell debt maturing between 2015 and 2017 on Dec. 1, the same day France holds auctions for securities due from 2017 to 2041.

OECD Forecasts

The Organization for Economic Cooperation and Development said today the euro region is already in a “mild” recession, predicting the 17-nation currency bloc is set to register growth of 1.6 percent this year and just 0.2 percent in 2012.

Portuguese bonds slid for a fourth day as the OECD predicted the nation’s economy will contract 3.2 percent in 2012, after shrinking 1.6 percent this year. Fitch Ratings cut the country’s credit grade to non-investment grade on Nov. 24, leading to its removal from a Barclays Plc index of European debt.

Ten-year yields climbed 81 basis points to 13.45 percent, widening the spread over German bunds past 11 percentage points for the first time since before the euro was created in 1999.

Volatility on Portuguese sovereign debt was the second- highest in euro-area markets today after Belgium, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Reports today also showed inflation in Germany eased to 2.8 percent in November from 2.9 percent in October, and consumer confidence will probably rise for a third month in December.

Two-year German notes were little changed, with the yield at 0.46 percent.

Economists at Barclays Capital and JPMorgan Chase are among those predicting the ECB will cut its key rate next week, reversing the ECB’s increases of April and July under former President Jean-Claude Trichet. They expect the benchmark then to be reduced to what would be a record low of 0.5 percent in 2012.

German bonds have returned 6.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds lost 11 percent, and Belgian debt dropped 7.2 percent.

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.