German Bunds Fall After Investor Confidence Improves; Greek Bonds Decline

German bunds fell, pushing 10-year yields up by the most in a month, as a report showing investor confidence in Europe’s largest economy improved sapped demand for the region’s safest securities.

Bunds dropped for the first time in three days as stocks rose around the world after a U.S. government report showed retail sales accelerated in February. Greek bonds issued to investors as part of the nation’s debt swap declined on their first full day of trading. Spanish securities slipped after European finance chiefs meeting yesterday called on the nation to make deeper budget cuts.

“Risk sentiment has improved,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “Bund yields are close to recent lows, so there’s some resistance to go lower. The ZEW survey was comfortably above expectations,” he said, referring to the German investor-confidence data.

The yield on the 10-year bund climbed six basis points, or 0.06 percentage point, to 1.82 percent at 4:35 p.m. London time after rising as much as seven basis points, the most since Feb. 13. The 2 percent bond due January 2022 fell 0.52, or 5.20 euros per 1,000-euro ($1,311) face amount, to 101.645.

The ZEW Center for European Economic Research said its index (SXXP) of German investor and analyst expectations, which aims to predict economic developments six months in advance, improved to 22.3 this month from 5.4 in February. U.S. retail sales gained 1.1 percent last month after rising 0.6 percent in January, the Commerce Department said in Washington.

The Stoxx Europe 600 Index (SXXP) of shares gained 1.8 percent, and the Standard & Poor’s 500 Index rose 0.9 percent.

Greek ‘Problems’

Greek 10- and 30-year bonds declined as investors remained concerned about the nation’s ability to reduce its debts even after euro-area finance ministers signed off on a 130 billion- euro bailout program yesterday.

Yields on shorter-maturity bonds climbed more than those on longer-term debt, inverting the so-called yield curve.

The yield on the 2 percent bonds due in February 2023 rose 57 basis points, to 19.02 percent. The price slid 1.085 to 26.75 cents on the euro. The rate on the 2042 debt climbed 41 basis points to 14.2 percent, meaning investors get 482 basis points less yield for holding the longer-dated securities.

Greece still has problems, in spite of the debt swap and restructuring,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Debt sustainability remains a key concern, and that’s reflected in the prices and the shape of the yield curve.”

Highest Volatility

Volatility in Greek debt was the second highest in euro- area markets today behind Finnish securities, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Spanish 10-year bonds fell for a second day after European finance chiefs called on the nation to prune an additional 0.5 percent of gross domestic product out of the 2012 budget. Prime Minister Mariano Rajoy on March 2 unilaterally raised the country’s deficit target for this year.

Rajoy’s goal of a deficit of 5.8 percent of GDP in 2012 “is dead,” Luxembourg Prime Minister Jean-Claude Juncker said yesterday after chairing a meeting of euro-area finance ministers in Brussels.

The Spanish 10-year (GSPG10YR) bond yield climbed nine basis points to 5.14 percent.

Italian Notes

Italian notes declined before the nation sells as much as 6 billion euros of three- and seven-year debt tomorrow. The two- year yield rose five basis points to 2.02 percent.

Investors should sell 30-year French bonds and buy their U.K. equivalents, Royal Bank of Scotland Group Plc analysts wrote in a note to clients.

“The timing for initiating or adding to this trade is appropriate given the upcoming U.K. budget, which we believe will provide further reassurance on the fiscal front and the looming French elections,” according to the note written by Biagio Lapolla, Claire Tucker and Andrew Roberts.

Should Socialist candidate Francois Hollande defeat incumbent Nicolas Sarkozy, his commitment to lowering the retirement age and objection to the euro-region’s fiscal compact may lead to “a non-negligible probability of France being downgraded,” they wrote.

The extra yield offered by French 30-year bonds over U.K. securities may widen to 80 basis points, the analysts said. The spread is currently 40 basis points.

The extra yield offered by U.S. Treasuries over German bunds widened to as much as 28.6 basis points, the most since Aug. 1, according to data compiled by Bloomberg.

The 10-year Treasury yield climbed four basis points to 2.08 percent. The spread between the nations’ two-year notes was 15 basis points after expanding to 16.7 basis points yesterday, the most since June 2010. The Federal Reserve meets to review monetary policy today.

German bunds have returned 0.4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds gained 2.7 percent, and French bonds rose 2.2 percent.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

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

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