European Bonds Advance Amid Stimulus Bets as France Absorbs Cut

European government bonds advanced as Federal Reserve Chairman Ben S. Bernanke quelled concern that a reduction of U.S. stimulus was imminent, boosting demand for fixed-income assets around the world.

German 10-year yields fell to the lowest in six weeks. Spain’s securities rose as borrowing costs fell at a 3.1 billion-euro ($4.07 billion) sale of debt maturing between 2016 and 2023. France’s 10-year yield dropped to the least in a month even after Fitch Ratings cut the nation’s credit ranking last week. Portuguese bonds gained for the first time in nine weeks after President Anibal Cavaco Silva said he remains confident the nation can overcome political turmoil.

“Bernanke clarifying his position on when and how QE will be tapered has certainly helped” European bonds, said Thomas Rahman, a strategist at RIA Capital Markets Ltd. in Edinburgh. “Actions from central banks continue to be supportive for the Bond markets. In the eurozone, the recent shocks appear to be relatively contained.”

Germany’s 10-year bund yield dropped four basis points, or 0.4 percentage point, to 1.52 percent at 5 p.m. London time yesterday, when it touched 1.50 percent, the lowest since June 7. The 1.5 percent bond due in May 2023 rose 0.36, or 3.60 euros per 1,000-euro face amount, to 99.82.

Bernanke told the Senate Banking Committee on July 18 that it was “way too early to make any judgment” about tapering asset purchases in September. The previous day, he said told the House Financial Services Committee that the central bank’s quantitative easing is “by no means on a preset course.”

Yields Gyrated

Bond yields have gyrated in the past month as central banks gave mixed messages about the future direction of monetary policy and 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 2012, after the Federal Reserve said five days earlier it may start reducing stimulus as early as this year. The yield has dropped 13 basis points since July 4, when European Central Bank President Mario Draghi said the institution will keep interest rates low for an “extended period.”

The Spanish 10-year yield decreased 10 basis points to 4.68 percent this week, while the rates on similar-maturity Portuguese bonds fell 71 basis points to 6.80 percent. Greece’s 2023 bonds advanced, with yields dropping 60 basis points to 10.19 percent after the country’s parliament passed a bill approving austerity measures needed to win the next tranche of international aid.

AAA Rating

France’s bonds advanced as it auctioned a combined 7.99 billion euros of notes on July 18, the first sale since Fitch stripped Europe’s second-largest economy of its AAA rating last week.

French 10-year yields were little changed at 2.19 percent, after touching 2.15 percent yesterday, the lowest since June 19.

A report next week will show a gauge of euro-area services and factory output increased to the highest in 18 months in July, according to a Bloomberg News survey.

A composite index based on a survey of purchasing managers in both industries rose to 49.1 from 48.7 in June, London-based Markit Economics will say on July 24, according to the median estimate of economists. That would be the highest since March 2012. A reading below 50 indicates contraction.

The Netherlands is due to sell bonds maturing in 2021 and 2042 next week, while France, Germany and Spain auction bills.

German bonds handed investors a loss of 0.6 percent this year through July 18, according to Bloomberg World Bond Indexes. French securities dropped 0.2 percent, while Spanish bonds returned 6 percent, the indexes show.

To contact the reporters on this story: Emma Charlton in London at echarlton1@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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