German Bunds Drop as Bets Pared on Japan Buying Amid Supply Glut

Europe’s higher-rated government bonds slid as investors pared bets on purchases of the securities by Japanese investors and Austria added to a glut of debt issuance from euro-area nations this week.

Germany’s 10-year bunds fell for a third day as the nation auctioned two-year notes, while Austria hired banks to sell about 4.5 billion euros of debt. Portuguese and Irish bonds rose as the nations’ international creditors said their aid should be extended by seven years. Italian 10-year bonds rose even as the government said public debt will reach a postwar record this year, while Spain’s climbed for the eighth-straight day on increased demand for higher-yielding assets.

“For Germany it’s probably supply,” said Lyn Graham- Taylor, a fixed-income strategist at Rabobank International in London. As for the prospects for investment flows from Japan, “pension funds take quite a long time to change strategic direction on what government bonds they are going to invest in,” he said.

German 10-year bund yields rose four basis points, or 0.04 percentage point, to 1.30 percent at 4:47 p.m. London time. The rate has climbed from 1.20 percent on April 5, the lowest level since July 24. The 1.5 percent security due February 2023 fell 0.40, or 4 euros per 1,000-euro ($1,308) face amount, to 101.81. The three-day decline is the longest since March 8.

Bunds stayed lower after the Federal Reserve released minutes showing several members of the Federal Open Market Committee said the central bank should begin tapering its bond buying program this year.

Austrian Bonds

Austria’s 10-year yield rose eight basis points to 1.66 percent. It set an all-time low of 1.46 percent two days ago as the bonds rallied with French and Belgian debt amid bets bond purchases by the Bank of Japan (8301) would encourage that nation’s investors to seek higher yields in Europe.

“One needs to be a little careful about reading too much into the BOJ’s impact on euro-zone assets,” Robin Marshall, director of fixed income at Smith & Williamson Investment Management Ltd. in London, said in an interview on Bloomberg Television’s “On the Move” with Francine Lacqua.

Germany auctioned two-year securities at an average yield of 0.02 percent, drawing bids for 9.1 billion euros for the notes, versus its sales target of 5 billion euros. Europe’s largest economy last sold two-year debt on March 13 at an average yield of 0.06 percent. That compares with a record-low auction yield of minus 0.06 percent set on July 18.

EFSF Sale

Austria’s sale of 21-year bonds was set at 1.5 billion euros and was priced at 19 basis points above mid-swap rate, a person familiar with the matter told Bloomberg News. It also sold 3 billion euros of 10-year securities via banks.

Euro-area governments and the European Financial Stability Facility issued 18 billion euros of securities yesterday.

A new 20-year bond for Austria “makes sense” given the good demand at auctions this week, Achilleas Georgolopoulos, a fixed-income strategist at Lloyds Banking Group Plc in London, wrote today in e-mailed comments. The EFSF received bids for 14 billion euros of the five-year notes it sold yesterday.

The yield on Austria’s 4.15 percent bond due March 2037 increased seven basis points to 2.49 percent after rising by four basis points yesterday.

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

Public Debt

Italy’s 10-year bond yield fell five basis points to 4.31 percent. The Italian Treasury sold 8 billion euros of one-year bills at an average yield of 0.922 percent as well as 3 billion euros of 91-day bills at 0.243 percent. It’s scheduled to auction debt maturing between 2016 and 2028 tomorrow.

The public debt will rise to 130.4 percent of gross domestic product in 2013 from 127 percent last year, Prime Minister Mario Monti’s office said in a statement after his Cabinet reviewed its budget plan. The budget deficit will drop to 2.9 percent of GDP this year, putting Italy within the European Union’s 3 percent limit.

Spain’s 10-year yield fell nine basis points to 4.64 percent, the lowest since November 2010. Rates on Portugal’s 4.95 percent bonds maturing in October 2023 fell six basis points to 6.40 percent, while those on Irish debt due March 2023 fell five basis points to 3.91 percent.

“Money is moving into the more risky markets,” said Allan von Mehren, chief analyst at Danske Bank A/S (DANSKE) in Copenhagen. “As long as there is such a strong bid in the market because of all the liquidity, then the European auctions should be well supported.”

Repayment Extension

The European Central Bank, European Commission and International Monetary Fund, as well as the EFSF made the recommendation on Irish and Portuguese bailouts in a joint report before a meeting of European finance ministers in Dublin on April 12-13, when further measures to help Ireland and Portugal are to be discussed.

They “would advocate to extend the maximum average maturity by seven years as it appears to be the best compromise accommodating the constraints and preferences of debtors and creditors,” said the report, which was distributed to German lawmakers and seen by Bloomberg News.

German bunds returned 0.8 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities gained 1.9 percent and Spanish bonds earned 5 percent, the indexes show.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh News at lmnyanda@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

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

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