Bunds Fall as China Growth Pledge Damps Safety Demand

Germany’s 10-year bunds dropped for the first time in a week after China’s leadership said it won’t let economic growth slow below 7 percent, damping demand for the safest fixed-income assets.

German two-year yields climbed to a two-week high as a report showed consumer confidence in the euro area improved more than economists estimated in July and an indicator of overnight borrowing costs rose. Spanish and Italian securities also declined. The Netherlands sold 1.79 billion euros ($2.37 billion) of bonds due in July 2021 and January 2042 and Spain auctioned bills.

“Risk sentiment in general has been well underpinned by the comments from the Chinese Premier,” said Allan von Mehren, chief analyst at Danske Bank A/S (DANSKE) in Copenhagen. German bund yields are rising with higher money-market rates on concern excess liquidity provided by the European Central Bank is diminishing, he said.

Germany’s 10-year yield rose four basis points, or 0.04 percentage point, to 1.55 percent at 4:29 p.m. London time, after falling to 1.50 percent on July 19, the lowest level since June 7. The 1.5 percent bund due in May 2023 dropped 0.325, or 3.25 euros per 1,000-euro face amount, to 99.535.

The two-year yield increased as much as five basis points to 0.15 percent, the highest since July 4.

China Growth

Chinese Premier Li Keqiang’s government sees 7 percent growth as the bottom line for tolerance of an economic slowdown, Chinese news organizations reported, signaling the nation will act to support expansion if needed and boosting Asian stocks.

The European Commission’s gauge of sentiment increased to minus 17.4 this month from minus 18.8 in June. That’s higher than the minus 18.3 estimated by 27 economists surveyed by Bloomberg News.

The European Banking Federation’s euro overnight index average, or Eonia, of unsecured lending deals was set at 0.101 percent yesterday from 0.098 percent at the end of last week. ECB excess liquidity was at 236 billion euros as of July 22, the lowest since Dec. 2011

The yield on the Euribor futures contract expiring in December 2015 increased six basis points to 0.86 percent, while the rate on the December 2013 contract rose three basis points to 0.33 percent.

Periphery Bonds

Italy’s 10-year yield rose four basis points to 4.35 percent and Spain’s climbed six basis points to 4.67 percent.

Portugal’s bonds fell for the first time in four days with the 10-year yield climbing two basis points to 6.41 percent. The rate dropped as much as 49 basis points to 6.31 percent yesterday, the lowest level since June 20.

Prime Minister Pedro Passos Coelho yesterday pledged to complete the country’s bailout program and push ahead with a government reshuffle after lawmakers failed to reach agreement on cost cuts last week.

The Netherlands sold 30-year bonds at an average yield of 2.581 percent, up from 2.408 percent at its previous sale of the securities on Jan. 22.

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

German bunds handed investors a loss of 0.6 percent this year through yesterday, according to Bloomberg World Bond Indexes. Dutch securities fell 0.7 percent, while Portugal’s returned 2.5 percent.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@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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