German 10-Year Bunds Decline as Cyprus Considers Bailout Options

German 10-year bunds fell for the first time in five days as Cyprus studied options to renegotiate an international bailout, damping demand for Europe’s safest fixed-income assets.

Benchmark yields climbed from near an 11-week low even as Germany sold the securities at the lowest rate since July. The European Central Bank reaffirmed its commitment to offer funding to Cyprus yesterday, after the country’s lawmakers rejected a levy on bank deposits. The nation hasn’t reached any deal for the sale of Cyprus Popular Bank Plc, government spokesman Christos Stylianides said today. Spanish and Italian bonds advanced.

“We had a big move in bunds yesterday but things are stabilizing,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA (UCG) in Milan. “Investors are waiting for some more news to get a better insight into what is going to happen. There are some factors which may be supportive of risk, including the ECB saying it would provide liquidity.”

German 10-year bund yields increased three basis points, or 0.03 percentage point, to 1.38 percent at 3:28 p.m. London time. The rate dropped to 1.34 percent yesterday, the lowest since Jan. 2. The 1.5 percent security due February 2023 fell 0.265, or 2.65 euros per 1,000-euro ($1,294) face amount, to 101.15.

The two-year note yield rose one basis point to 0.014 percent, after dropping to minus 0.006 percent yesterday, also the least since Jan. 2.

ECB Commitment

“The ECB reaffirms its commitment to provide liquidity as needed within the existing rules” for Cyprus, the Frankfurt- based central bank said in a statement yesterday.

Luxembourg Finance Minister Luc Frieden called for a meeting of the 17 euro-area finance ministers to discuss the situation. Cyprus accounts for less than half of one percent of the currency bloc’s economy.

Bunds stayed lower even after German Chancellor Angela Merkel said that Cyprus’s banking sector must contribute to the bailout and ECB Executive Board member Joerg Asmussen said in an interview with German weekly newspaper Die Zeit that the central bank can “only provide emergency liquidity to solvent banks.”

A preliminary deal to sell the Cyprus Popular Bank to Russian investors was reached, the Kathimerini newspaper reported earlier, without citing anyone.

The ECB may delay a decision on whether to continue to supply Cypriot banks with emergency funds as it awaits clarity on the nation’s bailout, according to two people familiar with the deliberations.

Delayed Deal

The delay gives the Cypriot government and euro-area finance ministers five more days to formulate a deal to prevent the implosion of the island’s banks. The ECB has no interest in forcing a collapse before a political decision has been taken, the people said.

Cyprus is not a major problem for the global economy, Laurence D. Fink, chief executive officer of BlackRock Inc. (BLK), the world’s largest asset manager, said today.

“It’s not a really major economic issue,” Fink said in a Bloomberg Television interview in Hong Kong. “It’s a $10 billion issue. It does remind us of the frailty of Europe. It does remind us that the European fix will be multiple years.”

Spain’s 10-year bond yield fell seven basis points to 4.97 percent and Italy’s dropped 10 basis points to 4.63 percent.

The yield on the Spanish securities climbed to a euro-era record of 7.75 percent on July 25 amid concern the currency bloc would fragment. Borrowing costs tumbled after ECB President Mario Draghi pledged that month to keep the euro-area intact.

Cyprus Bonds

Cyprus’s government bonds rose for the first time this week, pushing the yield on the 4.625 percent security due February 2020 down 47 basis points to 11.95 percent. The bid price was 66.265, while the offer price was 67.985. The rate surged 374 basis points over the past two days.

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

Germany allotted 3.36 billion euros of 10-year bunds at an average yield of 1.36 percent, the Frankfurt-based Bundesbank said in a statement. That compares with a yield of 1.66 percent at the previous auction on Feb. 20 and a record-low 1.31 percent set in July.

Portugal’s borrowing costs also fell as it sold 1.2 billion euros of 18-month bills at an average yield of 1.506 percent, compared with 1.963 percent at a previous auction on Jan. 16. The debt agency also allotted 300 million euros of three-month securities at 0.757 percent.

German bunds handed investors a return of 0.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds lost 0.1 percent, while Spanish securities gained 3.1 percent.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

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

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