German Bonds Little Changed on Fed Taper, Berlusconi Speculation

Germany’s 10-year bonds were little changed, with yields near the highest in 17 months, as investors speculated on whether the Federal Reserve will reduce its bond-buying program this month.

Italian securities were little changed amid concern a Senate committee discussion on whether to expel former Prime Minister Silvio Berlusconi will disrupt the coalition government’s stability. The additional yield investors demand to hold Treasuries over German bunds fell after data last week showed U.S. payrolls rose less in August than analysts forecast, damping the case for tapering stimulus. Germany plans to sell five billion euros ($6.6 billion) of 10-year debt on Wednesday.

“The fact is that the U.S. labor market does remain soggy so that raises a question of timing for the Fed,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London. “Also, how much of a taper? The market looks very much like just settling down and not wanting to go anywhere.”

Germany’s 10-year bund yielded 1.95 percent at 4:38 p.m. London time after reaching 2.05 percent on Sept. 6, the highest since March 21, 2012. The price of the 1.5 percent security due May 2023 was at 96.035.

Fed policy makers will decide to reduce Treasury bond purchases to $35 billion each month from $45 billion at their Sept. 17-18 meeting while maintaining mortgage-bond buying at $40 billion, according to the median of 34 responses from economists surveyed by Bloomberg News on Sept. 6. That pace was unchanged from an Aug. 9-13 survey.

Treasuries Spread

The yield difference between 10-year bunds and similar-maturity U.S. Treasuries narrowed five basis points, or 0.05 percentage point, to 93 basis points, down from as much as 104 basis points on Aug. 1.

The Treasury 10-year yield dropped five basis points to 2.89 percent.

Spain’s 10-year yield was little changed at 4.54 percent and the rate on similar-maturity Italian bonds was at 4.52 percent. The additional yield investors demand to hold the Spanish securities over Italy’s slid to as little as one basis point earlier, the least in 18 months.

An Italian Senate committee begins discussions today about whether to expel Berlusconi following his conviction for tax fraud. The three-time former premier threatened Aug. 30 to withdraw his party’s support for the coalition government if the senators vote to eject him from parliament.

Political Issues

“We still view the spread narrowing between Spain and Italy, and if anything Spain to trade below Italy just because of the Italian political issues,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “We don’t expect any immediate decision but obviously it’s got quite large ramifications for Italian politics.”

Volatility on Belgian bonds was the highest in euro-area markets today followed by those of Finland and Austria, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps. Finland’s 10-year yield was little changed at 2.24 percent.

Germany last sold 10-year bonds on Aug. 14 at an average yield of 1.80 percent, up from 1.57 percent at a July 17 sale.

German bonds lost 2.6 percent this year through Sept. 6, according to Bloomberg World Bond Indexes. Italian securities returned 3.1 percent, while Spain’s earned 7.7 percent.

To contact the reporter on this story: 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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