German Bunds Rise on Syria Tension; Portuguese Securities Slide

Germany’s government bonds advanced for the first time in four weeks as the prospect of a U.S.-led military strike on Syria revived demand for the safest fixed-income assets.

Benchmark 10-year bund yields fell from the highest level in 17 months as reports this week showed the euro-area unemployment rate stayed at a record high in July, while inflation slowed in August. Portuguese bonds dropped for a second week as a court’s opposition to ending labor contracts for some state workers raised concern the nation will struggle to meet its deficit targets. Spanish and Italian bonds declined as European stocks slumped and oil jumped to a six-month high.

“The key factor behind the change in dynamics was clearly the tensions in Syria,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in Paris. “Not only is there a geopolitical risk supporting some flight to quality, but also the rise in oil prices could be a threat for the recovery of the developed economies, and that’s proved positive for bunds.”

Germany’s 10-year yield fell eight basis points, or 0.08 percentage point, this week to 1.86 percent after climbing to 1.98 percent on Aug. 23, the highest level since March 2012. The 1.5 percent bund due in May 2023 fell 0.685, or 6.85 euros per 1,000-euro ($1,319) face amount, to 96.865.

The bonds of other core markets also advanced. The Dutch 10-year yield dropped four basis points to 2.29 percent, and Austria’s fell four basis points to 2.30 percent.

Military Strike

French President Francois Hollande said in an interview published yesterday the country may act as the principal U.S. ally in a military strike on Syria, after British lawmakers pulled the U.K. out of a mission to punish the use of chemical weapons. Pentagon planners are considering whether an attack would aggravate the civil war by triggering reprisals.

Portuguese 10-year yields climbed to the highest level in almost six weeks yesterday after the Constitutional Court said on the previous day that the government’s proposed plan to scrap contracts for some state workers was not constitutional.

Portugal’s 10-year yield climbed 17 basis points this week to 6.73 percent after rising to 6.79 percent yesterday, the highest level since July 22.

The euro-area jobless rate stayed at 12.1 percent last month, the European Union’s statistics office said yesterday. Consumer prices rose 1.3 percent in August from a year earlier after a 1.6 percent gain in July, the statistics office said.

Spain’s (GSPG10YR) 10-year yield rose eight basis points this week to 4.54 percent and similar-maturity Italian rates climbed eight basis points to 4.40 percent. The Stoxx Europe 600 Index dropped 2.4 percent, while Brent crude climbed to as high as $117.34 a barrel on Aug. 28, the most since February.

European Central Bank policy makers will keep their benchmark interest rate at a record-low 0.5 percent when they meet on Sept. 5, according to a Bloomberg News survey. Austria, Germany, Spain and France are selling bonds next week.

German bonds lost 2.2 percent this year through Aug. 29, according to Bloomberg World Bond Indexes. Italian securities returned 3.7 percent and Spain’s rose 7.4 percent.

To contact the reporter on this story: Morgane Lapeyre in London at mlapeyre@bloomberg.net

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

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