French, Austrian Bonds Jump as Investors Seek Havens With Yield
French and Austrian bonds rose, sending their five-year yields to record lows, as investors favored higher-yielding alternatives to German securities amid the deepening euro-area sovereign debt crisis.
Austria’s two-year yields also dropped to an all-time low after a European Union summit ended with leaders divided over joint debt sales. The region’s temporary rescue fund, the European Financial Stability Facility, sold three-year securities at a yield spread of 104 basis points more than German notes with a similar maturity, providing investors another choice.
“France is coming back nicely in the hunt for yield,” said Dagmar Dvorak, a director of fixed income and currency at Baring Asset Management in London, which oversees $15 billion of fixed-income assets. “It’s recognition that there are core, or semi-core countries, where you can put your money fairly safely.”
The French five-year yield decreased 16 basis points, or 0.16 percentage point, to 1.37 percent at 4:32 p.m. London time, after being as low as 1.355 percent. The 1.75 percent security due February 2017 gained 0.72, or 7.20 euros per 1,000-euro ($1,254) face amount, to 101.72. Thirty-year yields plunged 24 basis points to 3.18 percent.
Austria’s five-year yield slipped 12 basis points to a record 1.27 percent, while its two-year note yields dropped nine basis points to 0.41 percent.
The nations’ securities were the most volatile government bonds among euro-area markets today, followed by Belgium, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. The Belgian 10-year yield decreased 16 basis points to 3.08 percent.
French bonds held their eighth day of gains after Moody’s Investors Service said plans by the government of newly elected President Francois Hollande to control his nation’s debt are positive for France’s credit outlook and necessary to maintain an Aaa grade.
“The new administration’s strong commitment to the achievement of sustainable public finances is credit-positive,” Moody’s said today in a ‘Credit Opinion’ report. Moody’s took no rating action and kept France at Aaa with a negative outlook.
German 10-year yields were little changed at 1.39 percent, after being as low as 1.351 percent, the least on record.
That left the extra yield, or spread, that investors get for buying 10-year French bonds over similar-maturity German bunds at 115 basis points, from 136 basis points yesterday. Five-year French notes yielded 89 basis points more than their German peers, from 108 basis points yesterday.
EU leaders meeting in Brussels late yesterday came up with no new measures to end the crisis. The 18th summit held during the financial turmoil concluded with AAA rated countries saying joint borrowing would force up their own borrowing costs and give deficit-prone states an incentive to keep spending.
“A lot of uncertainty remains in place,” Dvorak said. “There has been less of a solution than the market probably expected from yesterday’s summit.”
The EFSF sold 3 billion euros of securities due in June 2015 at 18 basis points more than the benchmark swap rate, according to data compiled by Bloomberg.
“With German yields at these levels, it’s very difficult to go and chase them,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “It’s a no brainer,” Ostwald said, referring to the relative attractiveness of the EFSF notes on sale today and the securities of countries including France and Austria.
German debt has returned 3.4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. France’s securities gained 4 percent and Austria’s 4.5 percent.
Investors favored bonds from the region’s stronger countries as a report showed European services and manufacturing output contracted more than economists forecast.
A composite index based on a survey of purchasing managers in both industries in the 17-nation euro area fell to 45.9 from 46.7 in April, London-based Markit Economics said today. Economists had forecast a drop to 46.6, the median of 14 estimates in a Bloomberg News survey showed. The Munich-based Ifo institute said its business climate index slid to 106.9 from 109.9 in April, more than economists estimated.
Yields are “reflecting quite significant uncertainty at the moment, so the market is pricing in a very weak scenario,” said Rasmus Rousing, a fixed-income strategist at Credit Suisse Group AG in Zurich.
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