German Bunds Rise With French, Dutch Bonds as Recession Deepens

Germany’s 10-year bonds advanced, snapping two days of declines, as economic reports added to signs the recession in the 17-nation region is deepening.

French, Dutch and Austrian securities also gained as stocks declined around the world, boosting demand for the region’s safer assets. Euro-area gross domestic product shrank 0.2 percent in the first quarter, while separate data showed retail sales in the region fell in April and services contracted last month. The European Central Bank will keep its main interest rate at a record-low 0.5 percent at a policy meeting tomorrow, according to a Bloomberg News survey.

“The data today looked dreadful,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S in Copenhagen. “The ECB will probably not move tomorrow but I would not be surprised if its rhetoric would turn a bit more dovish than last time. Europe has no growth. Stock losses also helped bunds.”

The 10-year bund yield dropped three basis points, or 0.03 percentage point, to 1.52 percent at 4:48 p.m. London time after climbing to 1.57 percent on June 3, the highest level since Feb. 25. The 1.5 percent security due in May 2023 rose 0.265, or 2.65 euros per 1,000-euro ($1,309) face amount, to 99.875.

The rate on France’s 10-year securities fell two basis points to 2.06 percent. The yields on similar-maturity Dutch bonds also dropped two basis points, to 1.85 percent, and those on Austrian debt declined the same amount to 1.89 percent.

GDP Shrinks

Euro-area GDP fell 0.2 percent last quarter, the European Union’s statistics office in Luxembourg said, confirming an estimate on May 15. A composite index based on a survey of purchasing managers in services and manufacturing industries in the region was at 47.7 last month, below the level of 50 that divides growth from contraction, Markit Economics said.

Germany’s five-year notes were little changed after the debt agency allotted an additional 3.35 billion euros of the securities at a yield of 0.54 percent at an auction. That’s up from 0.38 percent at the previous sale on May 8. The five-year note yielded 0.53 percent.

Yields on government bonds across the world have climbed over the past month amid speculation the Federal Reserve will curb its bond-buying program, known as quantitative easing.

“The higher yield than the last auction is associated with the general selloff associated with the Federal Reserve tapering,” Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London, wrote in a note to clients. “Overall, this appears to be a reasonable auction result.”

Fed Purchases

The Fed buys $85 billion of Treasury and mortgage debt each month to support the economy by putting downward pressure on interest rates. Chairman Ben S. Bernanke said on May 22 the central bank could reduce record stimulus if the economy shows sustained improvement.

Insight Investment, which oversees about $134 billion in fixed income and currencies, is buying Italian and Spanish debt with maturities of three to five years, according to Andrew Wickham, the company’s head of U.K. and global fixed income.

The securities have rallied during the past year as ECB President Mario Draghi said in July the central bank would do “whatever it takes” to preserve the single currency and in September announced details of a bond-purchase program known as Outright Monetary Transactions.

“We are buying them with the view that we will hold them to maturity,” Wickham said at a briefing in London. “The ECB is in a different mood to perhaps they were two or three years ago. The key difference is the existence of the OMT, the backstop for short-dated assets in that market.”

Italy’s 10-year yield rose four basis points to 4.14 percent and Spain’s climbed two basis points to 4.44 percent.

German securities handed investors a loss of 1.1 percent in the past year through yesterday, according to Bloomberg World Bond Indexes. Italian securities returned 16 percent and Spanish bonds gained 18 percent.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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

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