German Bunds Advance as Euro-Area Economy Shrinks; Italian Notes Decline

Germany’s bonds rose, with 10-year yields dropping to a seven-week low, after a European report showed the region’s economy shrank in the fourth quarter as the debt crisis undermined confidence.

Italian government securities fell for a second day as Greece struggled to meet a deadline to conclude a deal with creditors on a bond exchange required before it can access a 130 billion-euro ($171 billion) bailout. Portugal’s notes dropped even after the International Monetary Fund said the nation should be able to return to bond markets next year. Austria and the Netherlands sold bonds today, while Greece and the European Financial Stability Facility auctioned bills.

“The euro zone has a two-speed recovery with Germany and other core countries doing relatively well, while you have austerity” and recession in some of the high-debt nations, said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. The Greece talks “will continue to weigh on sentiment and support bunds.”

The 10-year bund yield fell four basis points, or 0.04 percentage point, to 1.78 percent at 4:31 p.m. London time after dropping to 1.77 percent yesterday, the lowest since Jan. 18. The 2 percent bond due January 2022 gained 0.38, or 3.80 euros per 1,000-euro face amount, to 101.925. Two-year yields dropped two basis points to 0.17 percent.

German bonds have returned 12 percent over the past year as the region’s debt crisis worsened, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek bonds slumped 67 percent and Portuguese debt fell 20 percent, the indexes show.

‘Widespread Weakness’

The 17-nation euro-area economy shrank 0.3 percent in the last three months of 2011, the European Union said today, confirming an initial estimate published on Feb. 15. Exports fell 0.4 percent, and household spending declined 0.4 percent.

“The breakdown of the report shows widespread weakness,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, wrote in an e-mailed note. “Activity is very weak.”

Italy’s two-year yield climbed nine basis points to 1.9 percent. The 10-year yield increased 13 basis points to 5.06 percent, widening the spread over similar-maturity bunds by 18 basis points to 3.28 percentage points.

Spain’s notes dropped for a third day, with the yield rising 14 basis points to 2.45 percent.

Greek Swap

Investors are seeking safety in German bunds as Greece seeks to conclude a deal with creditors before a bond repayment due March 20.

Investors have until March 8 to agree on a debt-swap plan that seeks to reduce their holdings of the nation’s bonds by 53.5 percent, helping the country avert an uncontrolled default.

“The Greek debt exchange is an important factor supporting bunds,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “The market is nervous after the rumors of a low participation rate reached so far. If the rate is less than 75 percent of eligible bonds, there is an elevated risk” the bond swap will fail.

The yield on the Greek bond due in 2022 was little changed at 36.54 percent with the price at 19 percent of face value.

Portuguese 10-year bonds declined for a third day, with the yield rising six basis points to 13.91 percent.

“Our baseline expectation remains that Portugal will be able to access markets,” Abebe Aemro Selassie, who is taking over supervision of the IMF portion of the international bailout plan for Portugal, said in an interview with Bloomberg Television. “This will not be easy.”

Bailout

The nation has been unable to sell debt due in more than a year since it was given a 78 billion-euro bailout in May 2011, following similar rescue deals in Greece and Ireland.

Volatility in Spanish government debt was the highest in euro-area markets today, followed by France, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

French bonds dropped for a third day, with the 10-year yield rising four basis points to 2.87 percent.

Austria’s 10-year securities fell as the nation sold 1.1 billion euros of 3.4 percent bonds maturing in November 2022, attracting bids equivalent to twice the amount on offer. The 10- year yield rose one basis point to 2.86 percent.

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