European Government Bonds Fall After BOE; Bernanke to Testify

European government bonds fell as the Bank of England backed away from increasing stimulus, fueling concern that global central banks are ready to trim the monetary accommodation that has supported prices.

French, Dutch and Italian securities declined, while Germany’s 10-year bund yields increased from near the lowest level in four weeks as the nation sold 3.19 billion euros ($4.19 billion) of the debt. Federal Reserve Chairman Ben S. Bernanke will testify to Congress today and may provide more details on when U.S. stimulus will be reduced. Spain’s bonds dropped before the country auctions debt due between 2016 and 2023 tomorrow.

“If the BOE starts considering not increasing quantitative easing but looking at other policies and the European Central Bank is also engaging on some form of mild forward guidance, it shows that the central banks of the largest economies are shifting,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. “That’s not good for bonds which have been supported by asset purchases over the past years.”

Germany’s 10-year bund yield rose three basis points, or 0.03 percentage point, to 1.58 percent at 12:08 p.m. London time after dropping to 1.54 percent on July 12, the lowest since June 19. The 1.5 percent bond due in May 2023 declined 0.28, or 2.80 euros per 1,000-euro face amount, to 99.265. Two-year yields increased one basis point to 0.1 percent.

Germany sold the 10-year securities at an average yield of 1.57 percent, up from 1.55 percent on June 19. That’s compares with a record-low 1.28 percent set at an auction on April 17.

Portugal sold bills today while Greece’s parliament is due to vote on policy changes needed to win the next tranche of international aid.

Spain, Italy

Spanish 10-year yields rose three basis points to 4.72 percent, while rates on similar-maturity Italian securities were two basis points higher at 4.49 percent.

Bank of England officials Paul Fisher and David Miles dropped their call for more stimulus in favor of a “mixed strategy” involving guidance on the path of interest rates, according to the minutes of the Monetary Policy Committee’s July 3-4 meeting published today in London.

Bernanke, who has said the Fed may start reducing its $85 billion in monthly bond purchases later this year assuming economic growth meets officials’ predictions, will appear before House members today and senators tomorrow to present the Fed’s semi-annual monetary policy report.

His statement to the House Financial Services Committee is set for public release at 8:30 a.m. in Washington, 90 minutes before he delivers it to lawmakers.

Bernanke Signals

“Any signals Bernanke might send out are front and center,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “The safe-haven bid has been put back into bunds again.” German 10-year yields have fallen eight basis points in the past week.

German bunds have outperformed Treasuries amid speculation the ECB will maintain or expand its stimulus to pull the 17-nation region out of its recession.

The extra yield, or spread, that investors receive for holding 10-year Treasuries instead of similar-maturity bunds increased two basis points to 97 basis points today, up from 44 at the end of 2012. It reached 102 basis points on July 12, the most since 2006, based on closing prices compiled by Bloomberg.

Spread Widening

Investors should still 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.”

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

France’s 10-year yield climbed four basis points to 2.22 percent, while the rate on similar-maturity Dutch bonds added three basis points to 2 percent.

German bonds handed investors a loss of 0.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spanish securities returned 5.8 percent and Italy’s gained 2.4 percent, the indexes show.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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

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