Germany’s Bonds Drop as Economic Outlook Damps Demand for Safety

Germany’s 10-year government bonds declined for a second week, pushing yields up by the most since June, as signs the global economy is improving damped demand for the euro region’s safest fixed-income assets.

Benchmark yields climbed to a 16-month high this week, while rates in France, the Netherlands and Finland all posted the biggest increases in two months. Reports showed the euro-area’s economy emerged from a record-long recession in the second quarter, while U.S. initial jobless claims dropped to the lowest level in almost six years, spurring speculation the Federal Reserve will slow stimulus.

“Economic data this week suggested the recession is either over or getting less severe in the euro zone,” said Soeren Moerch, the head of fixed-income trading at Danske Bank A/S (DANSKE) in Copenhagen. “Data in the U.S. support a view that the Fed may start tapering its bond purchases soon. Those factors are pushing yields in the core market higher.”

Germany’s 10-year bund yield climbed 20 basis points, or 0.2 percentage point, this week to 1.88 percent at 5 p.m. London time yesterday, the biggest increase since the period ended June 21. The rate reached 1.91 percent on Aug. 15, the highest since March 28, 2012. The 1.5 percent security due in May 2023 fell 1.755, or 17.55 euros per 1,000-euro (1,333) face amount, to 96.635.

French (GFRN10) 10-year yields rose 17 basis points this week, the most since June 21, to 2.40 percent, while the rate on similar-maturity Dutch (GNTH10YR) bonds climbed 20 basis points to 2.26 percent, also the biggest weekly increase since June 21.

Economy Expands

Gross domestic product in the euro region rose 0.3 percent in the three months through June after shrinking 0.3 percent in the previous quarter, the European Union statistic’s office said on Aug. 14. A separate report yesterday showed exports from the region increased for the first time in three months.

While the economy expanded, data yesterday showed consumer prices in the currency bloc remain subdued last month. The annual inflation rate was 1.6 percent, the same as in June. That was in line with an earlier estimate released on July 31.

Spain’s 10-year bonds advanced for a fifth week, the longest winning streak since May. The 10-year yield dropped 14 basis points from Aug. 9 to 4.36 percent yesterday, the lowest since May 31. The rate on similar-maturity Italian (GBTPGR10) debt was little changed at 4.19 percent after declining to 4.15 percent on Aug. 13, the least since June 6.

German bonds may extend their decline next week before euro-area services and manufacturing data that economists said will add to evidence the region’s recovery is gaining momentum. A composite index of services and manufacturing output rose to 50.9 in August from 50.5 in July, according to a Bloomberg survey before the report from Markit Economics on Aug. 22.

German government bonds lost 2.4 percent this year through Aug. 15, according to Bloomberg World Bond Indexes. Italy’s securities returned 4.3 percent and Spain (GSPG10YR)’s earned 7.8 percent.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net

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