German government bonds rose for a second day after industry reports added to signs growth in the euro area has stalled, boosting demand for safer assets.
Ten-year bund yields dropped to the lowest in a week after purchasing managers’ indexes showed the region’s service sector contracted in August as German manufacturing shrank for a sixth month. Spanish bonds dropped, widening the extra yield investors demand to hold the country’s 10-year bonds instead of German ones beyond five percentage points. Losses in Spanish bonds were tempered after Reuters reported the nation was in talks with European officials over the terms of sovereign aid.
“They are very sluggish figures for Europe,” said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. “They are below that magical 50 level on the PMIs. It highlights the problems there are in Europe and the general weaknesses. It favors the safe havens more than anyone else.”
Germany’s 10-year bund yield fell eight basis points, or 0.08 percentage point, to 1.38 percent at 5 p.m. London time, after falling to 1.36 percent, the lowest level since Aug. 10. The 1.75 percent bond due in July 2022 rose 0.775, or 7.75 euros per 1,000-euro face amount, to 103.405.
The 10-year yield is likely to decline to 1.30 percent by year-end, Afseth said.
A gauge of services in the euro-area fell to 47.5 this month from 47.9 in July, London-based Markit Economics said. A composite index based on services and manufacturing rose to 46.6 from 46.5, Markit said. Readings below 50 indicate contraction.
A German manufacturing index was at 45.1 in August, Markit said, a sixth month of contraction. German economic growth slowed to 0.3 percent in the second quarter, from 0.5 percent in the previous three months, the Federal Statistics Office said, confirming an initial estimate published on Aug. 14.
Spanish 10-year bonds declined for a second day, widening the extra yield investors demand to hold the securities instead of similar-maturity German bunds to as much as 505 basis points, the most since Aug. 17.
Spain’s 10-year bond yield increased seven basis points to 6.35 percent after rising as much as 17 basis points.
The country is negotiating with the euro zone over conditions for aid to bring down borrowing costs, Reuters reported, citing three sources with knowledge of the matter.
Blackrock Inc. (BLK) has started to buy shorter-dated Spanish notes and longer-maturity Italian debt, Rick Rieder, chief investment officer for fundamental fixed income in New York, said in an interview with Deirdre Bolton on Bloomberg Television. The company was increasing its holdings of the securities amid speculation the ECB will buy the bonds of both countries to contain the debt crisis, he said. Blackrock is the world’s largest asset manager with $3.56 trillion in assets.
German Chancellor Angela Merkel hosts French President Francois Hollande in Berlin today as officials look for ways to stave off an immediate crisis before a report due next month from Greece’s international creditors on the health of the country’s finances.
Greek Prime Minister Antonis Samaras is due to follow Hollande to Germany’s capital tomorrow then travel to Paris on Aug. 25. The nation needs more time to carry out policy changes to address its debt woes, he said in an interview published yesterday in Germany’s Bild newspaper.
Greek bonds maturing in February 2023 rose, with the yield falling 15 basis points to 23.70 percent.
Ireland sold 1.02 billion euros of amortizing bonds, as the nation took another step back into credit markets.
The National Treasury Management Agency sold five amortizing bonds maturing from 15 years to 35 years at a weighted average yield of 5.91 percent. An amortizing facility is where the principal of the bond is paid in installments over the life of the security instead of in full at maturity.
The yield on Ireland’s bond maturing in October 2020 fell eight basis points to 5.92 percent, after dropping below 6 percent for the first time in 22 months on Aug. 21.
Volatility on German government bonds was the third highest in euro-region markets today behind the Netherlands and Austria, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit-default swaps.
Bunds also rose as Treasuries extended a rally after minutes of the Federal Reserve’s most recent meeting showed policy makers are ready to boost record stimulus unless they are convinced the U.S. economy is poised to rebound.
Members of the policy-setting Federal Open Market Committee said further action would probably be needed fairly soon without evidence of “substantial and sustainable” improvement in the recovery, according to minutes of the July 31-Aug. 1 meeting released yesterday in Washington.
Germany’s bonds returned 3.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities fell 1.8 percent, and Ireland’s gained 18 percent.