Germany’s Bunds Decline as U.S. Debt Outlook Damps Safety Demand

Germany’s 10-year (USGG10YR) government bonds fell for a second week as speculation U.S. lawmakers would reach an agreement on raising the nation’s debt limit boosted stocks and curbed demand for the safest fixed-income assets.

The German 10-year yield climbed to the highest level in two weeks as benchmark U.S. Treasury yields also rose amid signs a U.S. default would be averted. Spain’s bonds declined in the week as the nation sold 4 billion euros ($5.4 billion) of a new 30-year security via banks, its first offering of the maturity since March. The European Stability Mechanism, the region’s permanent rescue fund, sold its first bonds on Oct. 8.

“We’ve seen a relief rally on risk markets after the hint that we might be moving towards a short-term solution in the U.S.,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “The announcement of the syndicated Spanish (GSPG10YR) auction caught the market by surprise and Spanish bonds corrected accordingly. We see value in Spanish bonds.”

Germany’s 10-year bund yield increased two basis points, or 0.02 percentage point, this week to 1.86 percent as of 5 p.m. London time yesterday after rising to 1.88 percent, the highest since Sept. 24. The 2 percent security due in August 2023 fell 0.21, or 2.10 euros per 1,000-euro face amount, to 101.21.

The Stoxx Europe 600 Index of shares snapped a two-week decline, adding 0.6 percent.

Debt Ceiling

President Barack Obama and House Republican leaders were moving toward an agreement to extend the nation’s borrowing authority even as they remained at odds over terms for ending the partial government shutdown. House Speaker John Boehner said he would offer a measure to postpone a potential U.S. default to Nov. 22 from Oct. 17, a step back from the brink that was enough to trigger the biggest rise in U.S. stocks in nine months, damping demand for core assets.

Benchmark Treasury 10-year note yields reached 2.72 percent on Oct. 10, the highest since Sept. 23.

Spain is seeking to reverse a shortening in the average maturity of its debt after the limited market access it suffered during the sovereign-debt crisis made it more attractive to issue lower-yielding, shorter-dated notes.

The Madrid-based Treasury sold 4 billion euros of 2044 bonds this week at an average yield of 5.213 percent, compared with a rate of 5.432 percent at an auction of bonds maturing in 2041 in March.

Spanish 10-year yields rose nine basis points in the week to 4.29 percent. The rate on the nation’s 30-year debt increased four basis points to 5.06 percent.

The ESM sold 7 billion euros of five-year debt, while Italy allotted 5 billion euros of seven-year bonds via banks.

German Confidence

A report on Oct. 15 will show German investor confidence remained at the highest level in more than three years this month, according to the median of 40 economist estimates in a Bloomberg News survey.

The ZEW Center for European Economic Research in Mannheim will say its index of investor and analyst expectations, which aims to predict economic developments six months in advance, held at 49.6, unchanged from September, which was the highest level since April 2010.

Germany is scheduled to auction 5 billion euros of two-year notes on Oct. 16. France plans to sell securities due between 2016 and 2040 the following day, when Spain will also offer debt maturing in 2016 and 2018.

German bonds lost 2 percent this year through Oct. 10, according to Bloomberg World Bond Indexes. Spanish securities returned 9.1 percent and Italy’s gained 5.1 percent.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

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

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