German Bonds Rise 4th Day as Demand Drops at Spanish Note Sale

German government bonds rose for a fourth day as demand declined at a Spanish auction of three-year notes, underpinning demand for the euro area’s safest assets.

Ten-year bunds extended their daily rally to the longest this month after a euro-area report showed services and manufacturing output dropped to a 39-month low in September. Spanish bonds halted this week’s advance that had been driven by optimism the country will seek financial aid. Finland’s bonds gained even as Standard & Poor’s said the nation risks losing its AAA rating.

“Demand for safety remains well in place,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “German 10-year yields hitting 1.8 percent is not as straightforward as it looked last week.”

Germany’s 10-year yield fell five basis points, or 0.05 percentage point, to 1.57 percent at 4:12 p.m. London time. The 1.5 percent bond due in September 2022 rose 0.44, or 4.40 euros per 1,000-euro ($1,295) face amount, to 99.325. The four-day gain is the longest since the period ended Aug. 28.

Spain sold 3.94 billion euros of new benchmark notes due in October 2015 at an average yield of 3.85 percent, compared with 3.68 percent at the previous auction on Sept. 6. Demand dropped to 1.56 times the amount sold, down from a so-called bid-to- cover ratio of 1.76 times. The country also sold 858 million euros of 10-year bonds.

Spanish 10-year bonds also dropped after the auction, with yields rising eight basis points to 5.78 percent. Italy’s 10- year yields climbed seven basis points to 4.99 percent.

ECB Purchases

Spain’s 10-year yields have fallen around 60 basis points since the close on Sept. 5, the day before European Central Bank President Mario Draghi unveiled details of the ECB’s asset- purchase plan, saying activation was dependent on countries asking for help. The Federal Reserve said on Sept. 13 it would buy mortgage securities to bolster the recovery.

“The longer Spain prevaricates in terms of requesting a bailout the greater the chance that the bailout premium, as it were, will be priced out of the market,” Richard McGuire, a senior fixed-income strategist at Rabobank International in London, said on Bloomberg Television’s “The Pulse” with Maryam Nemazee. “Yields will rise and the curve will flatten back, forcing the government to make that request.”

Spanish bonds due in more than 10 years have been the best- performing securities in the world this month, returning 11.5 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Similar- maturity German bunds have been the second worst performers, losing 4.4 percent, the indexes show.

Commerzbank Forecast

The additional bond purchases announced by the Fed and ECB this month mean German 10-year yields may rise above Commerzbank’s current year-end forecast of 1.70 percent as demand for safety wanes, Leister said.

A composite index based on a survey of purchasing managers in manufacturing and services in the euro area dropped to 45.9 from 46.3 in August, London-based Markit Economics said in an initial estimate. A reading below 50 indicates contraction.

The euro area’s economy contracted by 0.2 percent in the three months through June as fallout from the fiscal crisis damped consumer spending and corporate investment. The region’s unemployment rate is at a record 11.3 percent.

Volatility on Finnish bonds was the highest in euro-area markets today, followed by Italy, according to measures of 10- year or equivalent-maturity debt, the spread between two-year and 10-year securities and credit-default swaps.

The Finnish government must stick to its budget-balancing plans or face a downgrade of its top credit rating, S&P said in a statement.

Finland’s 10-year yield fell four basis points to 1.88 percent after rising to 1.98 percent on Sept. 17, the highest since June 29.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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