European Bonds Rise Amid Stimulus Optimism as Spain Sells Debt

European government bonds rose for a third day as Federal Reserve Chairman Ben S. Bernanke’s testimony to U.S. lawmakers buoyed optimism that central banks around the world will maintain stimulus.

Ten-year bund yields fell to the lowest in a month. Spain’s securities gained as borrowing costs fell at a 3.1 billion-euro ($4.1 billion) sale of debt maturing between 2016 and 2023. Dutch, Finnish and Austrian bonds also rose as the European Central Bank revised its collateral rules for refinancing banks. France’s bonds advanced as the nation sold notes in the first bond sale since Fitch Ratings cut the nation’s credit ranking.

“Bernanke was more dovish yesterday than he has been recently, and that’s helping core bonds,” said Anders Moeller Lumholtz, a senior analyst at Danske Bank A/S (DANSKE) in Copenhagen. “Central bank communication is key at the moment and whenever we have the Fed or European Central Bank speaking they are pushing the market around.”

Germany’s 10-year bund yield dropped three basis points, or 0.03 percentage point, to 1.51 percent at 4:24 p.m. London time after reaching 1.50 percent, the lowest since June 7. The 1.5 percent bond due in May 2023 rose 0.28, or 2.80 euros per 1,000-euro face amount, to 99.895.

The rate on similar-maturity Dutch bonds fell three basis points 1.94 percent, the least since June 19.

Debt Auctions

The U.S. central bank could keep buying bonds for longer if “financial conditions -- which have tightened recently -- were judged to be insufficiently accommodative to allow us to attain our mandated objectives,” Bernanke said yesterday in testimony to the House Financial Services Committee, keeping the door open to a delay in reducing the Fed’s stimulus program. He was scheduled to testify to the Senate Banking Committee from 10:30 a.m. in Washington today.

Bond yields have gyrated in the past month as central banks gave mixed messages about the future direction of monetary policy as economies recover at different speeds.

The German 10-year yield jumped to as much as 1.85 percent on June 24, the most since April, after the Federal Reserve said five days earlier it may start reducing stimulus as early as this year. The yield has dropped 14 basis points since July 4, when ECB President Mario Draghi said the central bank will keep interest rates low for an “extended period.”

Collateral Changes

The ECB said today it’s looking at ways to boost lending to small- and medium-sized companies by changing the eligibility of asset-backed securities. The Frankfurt-based central bank will reduce the risk premium, or haircut, applicable to asset-backed securities to 10 percent from 16 percent, according to an e-mailed statement.

The ECB also changed the haircuts it applies to sovereign bonds pledged as collateral in refinancing operations. While it reduced the risk premium on most securities rated at least A-, it increased haircuts on bonds rated from BBB+ to BBB-. That shift will affect banks that use government bonds issued in countries including Italy and Spain.

The Madrid-based Treasury sold more than its maximum target of 3 billion euros. Its three-year benchmark was sold at an average yield of 2.768 percent, down from 2.875 percent on July 4. A five-year note yielded 3.735 percent, down from 3.792 percent earlier this month, and its 10-year benchmark bond was priced to yield 4.723 percent, versus 4.765 percent on June 20.

‘Modest Amount’

“The auction went relatively smoothly, also on the back of modest amount on offer,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, wrote in a note to clients about the Spanish sale. “That said, uncertainties for the Spanish debt remain elevated and market dealers show some skepticism in maintaining outright long positions as risks of another leg of selloff going into August remain high.”

A long position is a bet that an asset will rise.

The Spanish 10-year yield decreased six basis points to 4.67 percent, while rates on similar-maturity French bonds fell three basis points to 2.17 percent. France auctioned a combined 7.99 billion euros of two-, four- and five-year notes. The nation also sold index-linked debt due between 2021 and 2040.

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

Finland’s 10-year yield dropped four basis points to 1.80 percent. The rate on Greece’s 2023 bonds declined for a sixth day, dropping 12 basis points to 10.28 percent after the country’s parliament passed a bill approving austerity measures needed to win the next tranche of international aid.

German bonds handed investors a loss of 0.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. French securities dropped 0.3 percent, while Spanish bonds returned 5.6 percent, the indexes show.

To contact the reporters on this story: 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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