European bonds rose, with German yields falling the most in two months, as concern U.S. lawmakers will fail to avert the so-called fiscal cliff of tax increases and spending cuts boosted demand for fixed-income assets.
Italy’s 10-year yields fell to the lowest in 18 months after borrowing costs declined as the nation sold bills. Spanish 10-year yields tumbled to an almost six-week low, while those on French bonds slid to the least since August. The rate on Belgium and Austria’s 10-year securities slipped to records. German bonds also rose as a report showed inflation in the euro area’s biggest economy slowed.
“The fiscal cliff is getting back into focus -- people are taking a closer look at the negotiations in Washington,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “The broader trend looks disinflationary and that’s potentially supportive for core European bonds, for bunds in particular.”
The German 10-year yield dropped seven basis points, or 0.07 percentage point, to 1.37 percent at 5 p.m. London time, after sliding nine basis points, the most since Sept. 26. The 1.5 percent bond maturing in September 2022 gained 0.65, or 6.50 euros per 1,000-euro ($1,291) face amount, to 101.19.
U.S. lawmakers are trying to avert a collection of $607 billion in automatic tax increases and spending cuts scheduled to take effect at the beginning of 2013 to prevent a short-term shock to the economy and reach an agreement on long-term deficit reduction. U.S. Senate Majority Leader Harry Reid said yesterday he is “disappointed” in the lack of progress in talks to avoid the fiscal cliff in January.
Any agreement over the fiscal cliff is likely to come at the last minute, boosting demand for the safest assets, Richard McGuire, a senior rates strategist at Rabobank International in London, said.
“The U.S. fiscal cliff remains the dominant force and that should support risk-off, safe-haven related trades,” McGuire said in an interview on Bloomberg Television’s “The Pulse” with Guy Johnson. Uncertainty will probably add “support for core safe havens in Europe as well, such as German bunds, even at these very low yield levels, despite the fact that systemic risk in Europe is diminishing in the wake of the green light that we saw for the Greek aid package.”
Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein joins other corporate executives at the White House today as President Barack Obama courts their support in talks.
Two-year German note yields fell three basis points to minus 0.01 percent. A negative yield means investors who hold the bond until it matures receive less than they paid to buy it.
Annual inflation in Germany, calculated using a harmonized European Union method, dropped to 2 percent in November from 2.1 percent last month, the Federal Statistics Office said in Wiesbaden. Inflation rates also declined in the states of Hesse, Brandenburg and Baden-Wuerttemberg. Slowing inflation preserves the value of fixed-income payments on bonds.
Belgium’s 10-year bond yield fell to 2.187 percent, the least since Bloomberg started collecting the data in 1993. The rate on similar-maturity Austrian bonds dropped to 1.737 percent.
Italy’s two-year yield tumbled for a 10th day, the longest run since August 2008, declining 12 basis points to 1.85 percent. The 10-year yield dropped 13 basis points to 4.59 percent after reaching 4.58 percent.
The nation sold 7.5 billion euros of 182-day bills at an average yield of 0.919 percent, the Bank of Italy said. That’s the lowest since April 2010 and compares with 1.347 percent at the previous auction of the maturity on Oct. 29.
Spain’s 10-year yields declined 19 basis points to 5.33 percent after falling to 5.32 percent, the lowest level since Oct. 19. The additional yield, or spread, investors demand to hold the securities instead of similar-maturity bunds narrowed 12 basis points to 396 basis points. The spread widened to a euro-era record 650 basis points on July 25.
Germany sold 3 billion euros of five-year notes today at an average yield of 0.41 percent, versus 0.42 percent on Nov. 7.
Volatility on Austrian bonds was the highest in developed markets today, followed by those of Switzerland and France, according to measures of 10-year or equivalent-maturity debt, the spread between two-and 10-year securities, and credit default swaps.
French 10-year yields dropped seven basis points to 2.05 percent after falling to as low as 2.04 percent, the least since Aug. 24. That’s below the closing market rate on Nov. 19 when Moody’s Investors Service lowered the nation’s credit rating to Aa1 from Aaa.
Euro-area finance ministers meeting in Brussels this week eased the terms on emergency aid for Greece, agreeing to lower the rates on bailout loans, suspend the nation’s interest payments for a decade, give the country more time to repay debt and engineered a bond buyback.
Greece is setting aside money to repurchase debt and will unveil the details next week in an offer to investors that must succeed, Finance Minister Yannis Stournaras said in Athens today. The buyback offer will be open to everyone and is voluntary. He revealed that there is a “plan B” in case it fails, but declined to specify further details.
Greece’s 2 percent bond due in February 2023 fell, with the yield jumping 12 basis points to 16.366 percent. The price was at 34.67 percent of face value, up from 31.19 on Oct. 31.
Irish bonds rose on speculation the country will get easier terms on its bailout loans after Greece won concessions.
The yield on Ireland’s 5 percent bond due in October 2020 dropped six basis points to 4.49 percent.
“Spreads to bunds in the periphery are very much supported today by this Greece deal and by speculation that especially countries like Portugal and Ireland will also get a better deal,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “At the same time you’ve got bund futures up nicely and Treasuries outperforming which shows in a way uncertainty is still out there.”
German bonds returned 3.4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spain’s debt gained 4.1 percent and Italy’s rose 19 percent.
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