German Bonds Fall With France’s as U.S. Report Damps Safety Bid

German government bonds fell, pushing 10-year yields toward the highest level in a month, as a report showing U.S. service industries expanded in July damped demand for safer assets.

French and Belgian securities declined as Markit Economics said a contraction in euro-area services slowed last month, adding to signs the region is recovering from a record-long recession. Spanish bonds dropped, pushing up yields from a six-week low. The Netherlands and France both sold bills.

“The U.S. services data is quite impressive,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “It’s a confirmation of the positive trend we’ve seen in the U.S. data, and that will point to higher yields for core bonds, including bunds.”

Germany’s 10-year bund yield rose four basis points, or 0.04 percentage point, to 1.69 percent at 5:02 p.m. London time after rising to 1.73 percent on Aug. 2, the most since July 5. The 1.5 percent security due in May 2023 fell 0.32, or 3.20 euros per 1,000-euro ($1,324) face amount, to 98.32.

The U.S. Institute for Supply Management’s non-manufacturing index increased to 56 from a more-than three-year low of 52.2 in June, a report from the Tempe, Arizona-based group showed today. The median estimate called for a gain to 53.1. Readings higher than 50 indicate growth.

Treasuries Drop

U.S. 10-year Treasury notes slid as traders bet growth is fast enough to allow the Federal Reserve to trim bond buying. The U.S. 10-year yield rose five basis points to 2.65 percent.

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

French 10-year yields rose six basis points to 2.25 percent. Belgian 10-year yields increased six basis points to 2.56 percent, while the rate on similar-maturity Dutch bonds climbed five basis points to 2.08 percent.

“France and Belgium are underperforming,” said David Schnautz, a fixed-income strategist at Commerzbank AG in New York. “Liquidity conditions have worsened in the summer, so there may be an illiquidity premium on these bonds, where slightly higher yields are demanded.”

An index of activity in the euro-area services industry based on a survey of purchasing managers improved to 49.8 from 48.3 in June, London-based Markit Economics said in a report. That’s above an initial estimate of 49.6 on July 24. A reading below 50 indicates contraction.

Dutch Auction

European Central Bank President Mario Draghi said last week that recent indicators signal the euro region is past the worst of the slump and data “tentatively confirm the expectation of a stabilization in economic activity.”

Europe’s economy stagnated in the three months through June and will return to growth this quarter after six straight quarters of contraction, according to a Bloomberg survey of economists on July 11.

The Netherlands auctioned 2.21 billion euros of 85-day Treasury bills at zero percent and 1.08 billion euros of 205-day securities at an average yield of 0.02 percent.

France allotted 3.99 billion euros of three-month bills at 0.043 percent, as well as a combined 3.87 billion euros of 168-and 350-day securities.

Spain’s 10-year yield rose three basis points to 4.59 percent after dropping to 4.54 percent, the lowest level since June 19.

German bonds lost 1.2 percent this year through Aug. 2, while their French counterparts fell 0.2 percent, according to Bloomberg World Bond Indexes. Italian securities returned 3.8 percent and Spain’s rose 6.7 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

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

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