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German Bond Yields Drop From 17-Month High on Fed Taper Concern

German bonds rose, with 10-year yields falling from the highest levels in almost 17 months, amid speculation Federal Reserve minutes tomorrow will signal policy makers are moving toward reducing bond purchases.

Austrian, Dutch and French government securities also rallied as European stocks declined and a report showed German producer prices unexpectedly fell in July, reviving demand for safer assets. Spain’s 10-year bonds dropped for a second day as the nation sold 4.15 billion euros ($5.57 billion) of bills. Greek bonds slumped before European Central Bank Executive Board member Joerg Asmussen visits Athens tomorrow.

“It’s just a pullback because the yield move in recent days has been very dynamic,” said Christian Reicherter, an analyst at DZ Bank AG based in Frankfurt. “Everybody is expecting that the Fed will announce that they will lower their buying of bonds. Speculation intensified in recent days.”

Germany’s 10-year yield fell six basis points, or 0.06 percentage point, to 1.84 percent at 4:23 p.m. London time after climbing to 1.92 percent yesterday, the highest since March 27, 2012. The 1.5 percent bund due in May 2023 rose 0.52, or 5.20 euros per 1,000-euro face amount, to 97.02.

Austrian 10-year yields declined four basis points to 2.27 percent, while similar-maturity Dutch rates fell three basis points to 2.27 percent and France (GFRN10)’s dropped four basis points to 2.40 percent.

Fed Minutes

Minutes of the Fed’s July 30-31 meeting may indicate when policy makers plan to starting reducing their monthly debt purchases of $85 billion. Officials will probably begin to trim the buying next month, according to 65 percent of economists surveyed by Bloomberg from Aug. 9-13.

German producer prices dropped 0.1 percent last month after being unchanged in June, the Federal Statistics Office in Wiesbaden said. Economists surveyed by Bloomberg predicted an increase of 0.2 percent.

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

Spanish bonds fell as demand declined at today’s bill auction. The nation sold 12-month bills at an average yield of 1.253 percent, down from 1.503 percent on July 16. Investors bid for 2.02 times the securities on offer, compared to 2.61 times last month. Demand also declined at the six-month bill sale.

Spain’s 10-year yield climbed seven basis points to 4.48 percent after rising five basis points yesterday. The rate on similar-maturity Italian bonds added four basis points to 4.32 percent.

Greek Bonds

Greek 10-year yields jumped the most in seven weeks as an ECB spokesman said Asmussen will travel to Athens to discuss the country’s adjustment program with policy makers.

Asmussen will hold bilateral meetings with Greek policy makers, a spokesman said.

Greece’s 10-year yield climbed 28 basis points to 10 percent, the biggest daily increase since July 3.

German 10-year bund futures may struggle to extend yesterday’s decline after the contract dropped to a 10-month low of 139.71 yesterday, according to analysts at Helaba Hessen-Thueringen led by Ralf Umlauf in Frankfurt. The contract expiring in September rose 0.5 percent to 140.65 today.

“A consolidation is possible today due to a lack of fundamental influences, with the latest lows at 139.71/72 forming the first support on the downside,” the analysts wrote in e-mailed note. “Price movements below this would create potential for a fall to 139.45.” Support refers to an area where buy orders may be clustered.

Germany is scheduled to sell 5 billion euros of two-year notes tomorrow. The nation last auctioned similar-maturity debt on July 10 at an average yield of 0.07 percent, compared with 0.18 percent at a previous sale on June 12.

The rate on two-year notes maturing in June 2015 dropped two basis points to 0.21 percent today.

German bonds lost 2.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. Austrian securities dropped 1.8 percent, while Spain’s returned 8 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

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

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