German Bund Yield Drops to Three-Week Low Before Spanish Budget

German 10-year bond yields fell to the lowest level in three weeks as Spain’s government prepared to approve the nation’s 2013 budget.

Benchmark 10-year bund yields headed for a sixth quarter of declines, the longest run since 1998, as concern regional leaders are failing to contain the debt crisis underpinned demand for safer assets. Protesters marched for a second night in Madrid yesterday, calling on Prime Minister Mariano Rajoy to reverse austerity measures before Budget Minister Cristobal Montoro announces the spending program. Italian bonds fell after demand dropped at a 6.65 billion-euro ($8.5 billion) debt sale.

“Given all the uncertainty that is out there, the market will remain in a sort of risk-off mode, and that’s positive for bunds,” said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht. “All these protests are weighing on sentiment.”

Germany’s 10-year yield was little changed at 1.46 percent at 11:38 a.m. London time after declining to 1.45 percent, the lowest level since Sept. 5. The 1.5 percent bond due in September 2022 traded at 100.335. The yield has dropped 12 basis points this quarter.

Protesters in Madrid called on Rajoy to reverse austerity measures as his nine-month-old government prepared its fifth package of budget cuts. The premier is struggling to persuade European leaders, voters and investors that he can tackle the crisis, as Spain’s bond yields surge amid rising investor expectations that Rajoy will delay asking for external aid.

‘Waiting Mode’

Spanish 10-year yields dropped four basis points to 6.03 percent, after rising above 6 percent yesterday for the first time since Sept. 18. Benchmark rates jumped 32 basis points yesterday, the biggest increase since Aug. 2.

“We’re in a waiting mode here where we see some volatility but the overall trend is sideways,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “So far Spain has been dedicated to reaching its budget targets and it’s very important that they stick to the commitment.”

Italy sold 2.93 billion euros of bonds due in November 2022 at an average yield of 5.24 percent, the central bank said. Investors bid for 1.33 times the amount allotted, down from a so-called bid-to-cover ratio of 1.42 times at a similar auction on Aug. 30. The nation also sold 2.72 billion euros of debt due in 2017 and 1 billion euros of floating-rate notes.

Italian Bonds

Italy’s 10-year bond yield was little changed at 5.21 percent. The extra yield that investors demand to hold Italian 10-year debt instead of similar-maturity German securities climbed to as much as 380 basis points, the most since Sept. 6.

Italian two-year notes fell for a sixth day, the longest run of declines since May 18. The yield climbed four basis points to 2.50 percent

German two-year notes were little changed after a report showed unemployment in Europe’s largest economy climbed for a sixth month in September. The number of Germans without a job increased a seasonally adjusted 9,000 to 2.91 million, the Federal Labor Agency in Nuremberg said.

Germany’s two-year note yielded 0.04 percent.

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

German bunds returned 3.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities were little changed, while Italy’s earned 14 percent.

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

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

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