German government bonds fell, pushing 10-year yields to the highest level in nine weeks, after the Bundesbank said the economy will improve “markedly” this quarter, damping demand for the region’s safest securities.
Austrian, French and Dutch bonds also declined before Federal Reserve Chairman Ben S. Bernanke discusses the U.S. economic outlook in congress tomorrow. German 10-year bunds dropped for a second day before the nation auctions 5 billion euros ($6.4 billion) of the securities tomorrow. Greek bonds fell for the first time in six days.
“Economic data is not giving us particular cause for concern at the moment so it just puts a little bit of upward pressure on those yields,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “Yields are at such historically low levels that it almost takes an ongoing stream of either bad economic news or risk-aversion type news particularly from the euro zone just to sustain the valuations that we got to.”
Germany’s 10-year yield rose two basis points, or 0.02 percentage point, to 1.40 percent at 4:42 p.m. London time after climbing to 1.42, the highest since March 18. The 1.5 percent bund due in February 2023 declined 0.18 or 1.80 euros per 1,000-euro face amount, to 100.935.
Austrian 10-year yields climbed four basis points to 1.75 percent, France’s gained three basis points to 1.91 percent and those in the Netherlands increased by three basis points to 1.71 percent.
“Economic activity is expected to improve markedly in the second quarter,” the Frankfurt-based central bank said today in its monthly report. “There is reason to hope that exports and investment in machinery and equipment, the demand components that can usually be relied upon most to set the pace for the German economy, will recover as well.”
Volatility on Belgian bonds was the highest in euro-area markets today followed by those of the Germany and Ireland, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
The extra yield investors demand to hold Austrian 10-year bonds instead of similar-maturity German bunds climbed one basis point to 35 basis points after earlier dropping to 33 basis points, the least since April 16.
“If you look at the Austria-German spread, there’s nothing there,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “If you are going to have German yields backing up, then the incentives for racing after the semi core at these sort of levels, both in yield and spread terms, are not easily justified.”
Bernanke will testify on the outlook for the U.S. economy before the Joint Economic Committee of Congress. The Federal Open Market Committee also releases the minutes of its April 30-May 1 meeting tomorrow.
Greek 10-year bond yields climbed three basis points to 8.21 percent after falling to 8.11 percent, the lowest level since June 2010.
German bonds handed investors a loss of 0.9 percent this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Austrian bunds dropped 0.4 percent and French bonds fell 0.3 percent.