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German Bund Yields Rise to One-Week High on Growth Signs; Spain Bonds Drop

German bund yields climbed to a one- week high after a report showed European service and manufacturing industries contracted less than economists forecast, damping demand for the region’s safest assets.

Spanish bonds (GSPG10YR) dropped for a third day amid speculation the nation will seek assistance from the European Union and the International Monetary Fund. German 10-year bonds pared declines after bids at a sale of the securities exceeded the maximum target for the first time in three auctions. Economic data this week showed factory output in the U.S. and China improved, and German unemployment dropped more than forecast. Portuguese two- year yields fell the most in eight weeks.

Rising German yields are partly due to “decent global macro data,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The sovereign crisis will ease off from the heights of last year, which should allow long-dated core yields to rise modestly,” he said, referring to debt from nations such as Germany.

The 10-year bund yield climbed three basis points to 1.93 percent at 4:21 p.m. London time, after rising to 1.94 percent, the highest level since Dec. 28. The 2 percent security due in January 2022 fell 0.28, or 2.8 euros per 1,000-euro ($1,293) face amount, to 100.63.

A euro-area composite index (ECPMICOU) based on a survey of purchasing managers in services and manufacturing industries rose to 48.3 from 47 in November, London-based Markit Economics said today. That was above an initial estimate of 47.9 on Dec. 15. A reading below 50 indicates contraction.

Global Growth

The Institute for Supply Management’s U.S. factory index expanded at the fastest pace in six months, the group said yesterday. China’s purchasing managers’ index for manufacturing increased to 50.3 last month from 49 in November, the logistics federation said Jan. 1.

Germany attracted bids for 5.14 billion euros of debt at its auction of 10-year securities, exceeding the maximum target of 5 billion euros. The Debt Agency accepted 4.06 billion euros of the bids. The average yield was 1.93 percent, versus 1.98 percent at the previous auction of 10-year bonds on Nov. 23.

“It went OK,” said Marchel Alexandrovich, a senior European economist at Jefferies International in London. “The real stress points will likely come when you get issuance from countries outside the core. And of course, when rating agencies have another round of sovereign downgrades investors will get a reminder that this crisis just carries on and on.”

German bonds returned 9.7 percent in 2011, the most since the financial crisis of 2008, according to indexes compiled by Bank of America Merrill Lynch.

Spanish Bonds

Spanish bonds fell after the Expansion newspaper cited unidentified people as saying the government is considering applying for loans from the EU’s rescue fund and the IMF. Deputy minister for communication, Carmen Martinez Castro, said there are no plans to seek external aid.

Spain’s 10-year yield (GSPG10YR) rose 14 basis points to 5.43 percent, after increasing 18 basis points yesterday. The difference in yield, or spread, over similar maturity bunds widened 12 basis points to 350 basis points.

The region of Valencia said it paid a loan owed to Deutsche Bank AG a week late and denied a report in El Pais that it had received a guarantee from the Spanish Treasury in order to facilitate the payment.

Portuguese two-year notes snapped a three-day decline after the nation sold three-month bills at an average yield of 4.346 percent, down from 4.873 percent at the previous sale of the securities on Dec. 7.

The European Central Bank bought Portuguese government bonds, according to two people with knowledge of the transactions, who declined to be identified because the deals are private.

The two-year yield dropped 152 basis points to 14.57 percent, the biggest intraday decline since Nov. 8.

Austria’s 10-year bonds fell for a fourth day, with the yield rising 13 basis points to 3.25 percent.

The extra yield, or spread (.AUSTGER), that investors get for holding the securities instead of German bunds widened nine basis points to 132 basis points.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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

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