German bonds fell, with 10-year yields rising to the most in three months, after Federal Reserve Bank of San Francisco President John Williams said the U.S. asset-purchase stimulus program might end this year.
The securities pared declines after a U.S. report showed manufacturing unexpectedly contracted in May at the fastest pace in four years. Spain’s 10-year yields climbed to the highest in six weeks before the nation sells four billion euros ($5.2 billion) of debt this week. Global bonds declined 1.5 percent in May, the steepest loss since 2004, as Fed policy makers sent mixed signals about whether they would slow the pace of their $85 billion monthly debt purchases this year.
“If the Fed tapers, it’s inevitable that bund yields are going to be dragged higher,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. “The trend for lower yields is over. If German rates rise then it’s going to be very difficult for peripheral spreads to compress.”
Germany’s 10-year bund yield climbed two basis points, or 0.02 percentage point, to 1.52 percent at 4:39 p.m. London time after reaching 1.57 percent, the highest since Feb. 25. The 1.5 percent bond due May 2023 fell 0.15, or 1.50 euros per 1,000-euro face amount, to 99.81. The nation’s two-year note yield added three basis points to 0.1 percent.
Williams, who doesn’t vote on monetary policy this year, told reporters in Stockholm that the Fed may start reducing the purchases by the summer and potentially end the quantitative-easing plan by year end.
The Institute for Supply Management’s factory index fell to 49 from the prior month’s 50.7, the Tempe, Arizona-based group’s report showed today. A level below 50 indicates contraction. The median forecast of economists surveyed by Bloomberg was 51.
Spain is scheduled to auction bonds due in 2015, 2016 and 2023 on Thursday, the same day that European Central Bank policy makers meet to set monetary policy. The ECB will maintain the benchmark interest rate at a record-low 0.5 percent, according to 57 of the 59 economists in a Bloomberg News survey before the announcement on June 6. The remaining two forecast a reduction to 0.25 percent.
“Risk appetite is waning,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Supply is looming in Spain, pressuring peripherals.”
The Spanish 10-year bond yield climbed two basis points to 4.46 percent. It earlier touched 4.53 percent, the highest since April 22.
An index based on a survey of purchasing managers in manufacturing industries in the 17-nation region was 48.3 last month, up from an initial estimate of 47.8 on May 23, London-based Markit Economics said today.
Greek bonds advanced as Japonica Partners announced a tender offer for as much as 2.9 billion euros of the securities.
The yield on Greece’s securities due in February 2023 fell four basis points to 9.34 percent.
The market for Greek bonds doesn’t reflect their intrinsic value, due to volatility and illiquidity, Japonica said in an e-mailed statement.
Volatility on Belgian bonds was the highest in euro-area markets today followed by those of Ireland and Portugal, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
German securities handed investors a loss of 0.7 percent this year through May 31, according to the Bloomberg Germany Sovereign Bond Index. (BGER) Spanish government bonds gained 6.5 percent, a separate index shows.