Bunds Underperform Treasuries After Fed Says Tapering Not Preset

German 10-year government bonds underperformed U.S. Treasuries after Federal Reserve Chairman Ben S. Bernanke damped speculation the U.S. central bank is close to ending its asset-purchase program.

The additional yield investors demand to hold 10-year Treasuries instead of similar-maturity bunds shrank to the least in almost two weeks after Bernanke said purchases “are by no means on a preset course” and could be reduced more quickly or expanded as economic conditions warrant. Spain’s bonds snapped a three-day advance before the country auctions debt tomorrow.

“Treasuries have more of a chance to benefit from a dovish Bernanke than bunds,” said David Schnautz, a fixed income strategist at Commerzbank AG in New York. “When exactly we’ll start seeing the tapering kick off, and in what incremental steps, will shape intraday valuations. In the bigger scheme of things, it’s clear that the Fed is way closer to the exit door” than the European Central Bank, he said.

Germany’s 10-year bund yield was little changed at 1.54 percent at 4:18 p.m. London time, after rising as much as four basis points. The price of the 1.5 percent bond due in May 2023 was 99.67. Two-year notes yielded 0.08 percent.

The yield spread between Treasury 10-year notes and German bunds narrowed five basis points, or 0.05 percentage point, to 93 basis points, the least since July 4 based on closing prices compiled by Bloomberg.

The gap had widened the most since 2006 earlier this month after Bernanke outlined on June 19 a possible timetable for tapering asset purchases. The spread increased to 102 basis points on July 12.

Bernanke Testimony

“The current pace of purchases could be maintained for longer” if inflation remained too low, the outlook for employment became less favorable or “financial conditions -- which have tightened recently -- were judged to be insufficiently accommodative to allow us to attain our mandated objectives,” Bernanke said today in prepared testimony to the House Financial Services Committee.

Investors should favor bunds and expect the spread to widen to 150 basis points, according to Alessandro Giansanti, a senior rate strategist at ING Groep NV in Amsterdam.

“The movement has been very fast, because the last 40 percent of the widening has happened over the last month, therefore a short-term reversal leg can’t be ruled out,” Giansanti wrote in a client note. “Nevertheless, we suggest to take advantage of any re-tightening in the spread to open long positions at more attractive levels.”

Different Situation

Commerzbank’s Schnautz also recommended investors buy bunds over Treasuries as “the situation is very much different in the euro zone compared to the U.S.” and the ECB may introduce further stimulus even as the Fed reduces its program.

Germany sold 3.19 billion euros ($4.18 billion) of 10-year securities at an average yield of 1.57 percent, up from 1.55 percent on June 19. That compares with a record-low 1.28 percent set at an auction on April 17.

Spain’s 10-year yields increased four basis points to 4.73 percent. The nation is scheduled to sell securities due between 2016 and 2023 tomorrow.

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

Portugal’s borrowing costs increased to the highest since October at an auction of 1.2 billion euros of 12-month bills.

The securities due in July 2014 were allotted at an average yield of 1.72 percent, the debt management agency said. That compares with 1.232 percent at a previous auction of 12-month bills on May 15, and is the highest since Portugal sold the securities at a rate of 2.1 percent on Oct. 17.

The nation’s two-year note yield fell for a third day, dropping eight basis points to 5.36 percent. The rate on 10-year bonds increased five basis points to 7.20 percent.

German bonds handed investors a loss of 0.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries dropped 2.5 percent, while Spanish securities returned 5.8 percent, the indexes show.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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

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