German Bund Yields Decline to Six-Week Low on ECB Stimulus Bias

German 10-year government bonds rose, with yields falling to the lowest in six weeks, on bets the European Central Bank will consider further stimulus even amid signs of a strengthening euro-area economy.

Benchmark 10-year bunds have risen this week as ECB President Mario Draghi said officials are ready to pump more cash into the banking system to stop borrowing costs from rising. BlackRock Inc. (BLK) said the central bank may add stimulus. Italy’s two-year notes fell, pushing yields up from near a seven-week low, as the nation auctioned 2.5 billion euros ($3.38 billion) of zero-coupon securities due in 2015.

“The economic data picture has brightened up significantly in recent weeks and months but there’s another problem when you look at the bank loan situation,” said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt. “We could expect lower yields in the days to come.”

Germany’s 10-year bund yield fell two basis points, or 0.02 percentage point, to 1.82 percent at 4:29 p.m. London time, the lowest since Aug. 15. The 2 percent security due in August 2023 gained 0.215, or 2.15 euros per 1,000-euro face amount, to 101.60. The two-year yield was little changed at 0.19 percent.

ECB Governing Council member Ewald Nowotny said yesterday that policy makers will debate whether more longer-term refinancing operations were needed. Policy maker Benoit Coeure said the discussion was “open,” though there had been no specific talk about what measure to use.

‘Any Instrument’

“We are ready to use any instrument, including another LTRO if needed, to maintain the short-term money markets at the level that is warranted by our assessment of inflation in the medium term,” Draghi said in the European Parliament in Brussels on Sept. 23.

As part of its strategy to restore confidence in the region’s economy amid the sovereign debt crisis, the ECB flooded the banking system with 1 trillion euros of three-year loans starting in December 2011 after financial institutions stopped lending to each other.

Another LTRO is becoming more likely, Scott Thiel, deputy chief investment officer for fundamental fixed-income at BlackRock, the world’s biggest money manager, said in London.

BlackRock is overweight Portuguese, Irish and Slovenian securities, he said, meaning the company holds a bigger percentage of the debt than the indexes against which they measure performance.

Italian Sale

Italy’s two-year note yield added two basis points to 1.73 percent after falling to 1.67 percent yesterday, the least since Aug. 7. The nation’s 10-year bond yield fell one basis point to 4.23 percent.

The Rome-based Treasury sold the zero-coupon securities due in June 2015 at an average yield of 1.623 percent, compared with 1.871 percent at an auction on Aug. 27. It also allotted 750 million euros of inflation-linked debt maturing in 2021.

Spain’s 10-year yield was little changed at 4.28 percent after sliding 21 basis points in the previous seven days.

Germany’s 10-year yields fell for a third day as investors awaited talks between Chancellor Angela Merkel’s victorious party bloc and possible coalition candidates.

Three days after Merkel won the highest share of votes in a German national election since 1990, negotiations on her third-term government may still be more than a week away as Europe’s biggest economy faces an extended political limbo.

Merkel has led efforts to get Europe’s most-indebted countries to accept economic reforms in return for aid, helping to ease a crisis that pushed borrowing costs in peripheral euro-area nations to records.

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

German bonds lost 1.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italian securities earned 4.6 percent, while Spain’s gained 9.2 percent.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; 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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