German Yields Fall to One-Month Low on Auction Demand

German 10-year bond yields fell to a one-month low after the nation’s borrowing costs dropped to the least on record at a sale of 4.15 billion euros ($5.1 billion) of debt.

Spain’s securities climbed for a second day as Prime Minister Mariano Rajoy detailed spending cuts in a speech in parliament, while saying he expects future negotiations to resolve the region’s financial woes to be tough. German two-year yields fell below zero for a fourth day after a report affirmed inflation in Europe’s biggest economy slowed in June. French two- and five-year yields declined to records.

“It’s a constructive auction,” said Eric Wand, a fixed- income strategist at Lloyds Banking Group Plc in London. “Bids were comfortably above market levels at the time of the sale. With yields at these levels, it continues to tell the story that core markets remain underpinned.”

The 10-year bund yield fell five basis points, or 0.05 percentage point, to 1.27 percent at 4:28 p.m. London time and reached 1.264 percent, the lowest since June 6. The 1.75 percent security due July 2022 gained 0.475 or 4.75 euros per 1,000-euro face amount to 104.455.

The two-year rate was at minus 0.013 percent after falling to as low as minus 0,016 percent. It slid as low as minus 0.018 percent on July 6.

Germany’s borrowing costs fell to a record-low 1.31 percent in today’s auction of 10-year securities, according to a statement from the Bundesbank. That’s down from 1.52 percent at a June 13 sale.

Spanish Cuts

German yields plunged to records this year as investors sought a haven from Europe’s financial turmoil. The 10-year rate dropped to 1.127 percent on June 1, the least since Bloomberg began collecting the data in 1989.

“Although yields are near all-time lows, fundamentally, we would continue to buy bunds on dips given the lack of fundamental progress in arresting the euro-area crisis,” fixed- income strategists at Citigroup Inc., including Peter Goves in London, wrote in an e-mailed report. “The very front-end of the German curve is trading negative as appetite for core paper remains the dominant driver across fixed-income markets,” he wrote, referring to short-maturity German notes.

Spanish 10-year bonds rose, pushing down the yield by 23 basis points to 6.58 percent. The rate on similar-maturity Italian debt dropped 14 basis points to 5.82 percent.

Spain will cut spending and raise taxes to reduce the deficit by 65 billion euros over the next 2 1/2 years, Rajoy said today.

French Yields

Inflation, calculated using a harmonized European Union method, eased to 2 percent, the lowest rate since January 2011, from 2.2 percent in May, the Federal Statistics Office in Wiesbaden said today.

Volatility on German government debt was the highest in euro-area markets today, followed by Austria and France, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit-default swaps.

French five-year yields dropped below 1 percent for the first time. The rate fell as much as eight basis points to 0.955 percent, the lowest since Bloomberg started tracking the data in 1990.

The nation’s 10-year yield slipped eight basis points to 2.32 percent, while its two-year rate declined as much as four basis points to 0.156 percent, also a record low.

The yield on two-year Austrian debt fell to 0.093 percent, the lowest since Bloomberg began tracking the data in 1999, while the nation’s five-year yield fell as much as eight basis points to an all-time low of 0.789 percent.

Dutch Record

Dutch two-year rates also fell to a record, with yields falling as much as four basis points to 0.04 percent.

German debt returned 3.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities earned 8 percent, while Spanish bonds lost 5.3 percent, the indexes show.

Bund futures expiring in September may rise a further 0.6 percent after breaching a so-called resistance level, according to UBS AG.

The contract may target 145.52 after breaking above the July 9 high of 144.28 Richard Adcock, head of fixed-income technical strategy in London, said in a telephone interview. The futures traded 0.4 percent higher at 144.61.

Resistance refers to an area on a graph where analysts expect sell orders to be clustered.

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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