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German Bunds Rise After Five-Year Note Sale; Italian, Spanish Bonds Fall

German bonds gained, with five-year yields falling to the lowest in two weeks, as demand rose at a sale of the notes and an official said the nation rejects plans to combine the current and permanent euro-area rescue funds.

Five-year securities snapped a two-day decline after investors submitted bids for 2.1 times the 4.09 billion euros ($5.5 billion) of debt sold, up from 1.5 times at the previous auction. Portugal’s bonds advanced for a fifth day as borrowing costs fell at an auction of three-month bills. Italian and Spanish bonds declined as the German official’s comments damped optimism European leaders will agree on a plan to combat the debt crisis at a summit this week.

“The auction was pretty good,” said Huw Worthington, a fixed-income strategist at Barclays Capital in London “It was one of the best bid to covers we’ve seen in a long time, which was what the market wanted to see.”

The German five-year yield fell eight basis points, or 0.08 percentage point, to 1.03 percent at 4:44 p.m. London time after dropping to 1.01 percent, the lowest since Nov. 23. The 1.25 percent note due in October 2016 rose 0.36, or 3.60 euros per 1,000-euro face amount, to 101.03. Ten-year rates declined nine basis points to 2.10 percent.

Investors submitted 8.67 billion euros of bids for the five-year debt on offer, compared with the maximum sales target of 5 billion euros. The average yield was 1.11 percent, versus the record-low 1 percent at the prior auction on Nov. 2.

‘Very Solid’

“Today’s five-year German auction received very solid demand,” Annalisa Piazza, a strategist at Newedge Group in London, wrote in an e-mail. “Total bids were robust.”

Portuguese 10-year bonds extended their winning streak to the longest in three months after the nation sold three-month bills at an average yield of 4.873 percent, down from 4.895 percent at a previous auction on Nov. 16.

The 10-year yield dropped 29 basis points to 12.94 percent, after falling 82 basis points over the previous four days.

Italian and Spanish bonds declined after the German official told reporters in Berlin that his nation is more pessimistic of the outcome of the European Union leaders’ summit beginning tomorrow in Brussels. It is already decided the permanent European Stability Mechanism will take over from the current rescue fund at an appointed time and Germany will oppose any attempt to change the agreed sequence, the official said.

Italy’s 10-year yield rose 12 basis points to 5.99 percent, and similar-maturity Spanish rates climbed 22 basis points to 5.43 percent.

ECB Meeting

The ECB will lower its benchmark rate by a quarter point to 1 percent, according to 53 of 58 economists in a Bloomberg News survey. Two said the central bank will cut rates to 0.75 percent, and three estimate it will leave them at 1.25 percent.

The central bank unexpectedly lowered borrowing costs on Nov. 3, saying the 17-nation euro-area economy will probably suffer a “mild recession.”

“Markets are waiting to see if the European Central Bank will be prepared to cut rates below 1 percent and we may get an indication of that tomorrow,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich.

The central bank may also announce a range of measures to stimulate bank lending, said three euro-area officials with knowledge of policy makers’ deliberations.

Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private.

German government bonds have handed investors a return of 7.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portuguese bonds have lost 25 percent over the same period and Italian debt has fallen 4.9 percent.

To contact the reporters on this story: Emma Charlton in London at echarlton1@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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