Germany’s Bonds Rise Second Day on Bets Fed to Maintain Stimulus

Germany’s government bonds rose for a second day on speculation the partial U.S. government shutdown this month slowed growth and will encourage the Federal Reserve to maintain its asset-buying program.

French (GFRN10), Dutch and Spanish securities also advanced as investors awaited more signals from the U.S. central bank about when it will start tapering stimulus that has capped borrowing costs. Bunds headed for a weekly gain after Fed Bank of Chicago President Charles Evans said yesterday policy makers should postpone slowing the $85 billion of monthly purchases after the shutdown stopped the flow of economic data used to gauge growth. Italy’s 10-year yields fell to the lowest level in two months.

“Since the U.S. fiscal agreement, markets have started to contemplate the impact on the economy and monetary policy, and the Fed might well delay the start of tapering well into the first quarter of 2014,” said Mathias Van Der Jeugt, a fixed-income strategist at KBC Bank NV in Brussels. “That’s why yields are trending lower. As you see U.S. yields go lower, the bund follows.”

Germany’s 10-year yield fell three basis points, or 0.03 percentage point, to 1.84 percent at 4:32 p.m. London time. The 2 percent bund due in August 2023 climbed 0.285, or 2.85 euros per 1,000-euro ($1,369) face amount, to 101.465. The yield dropped three basis points this week, having risen in each of the previous two weeks.

France, Netherlands

Similar-maturity French yields declined three basis points to 2.35 percent, while those of the Netherlands fell five basis points to 2.19 percent and Spain’s dropped three basis points to 4.26 percent.

U.S. President Barack Obama said yesterday the 16-day federal shutdown “inflicted completely unnecessary damage” on the economy and increased the government’s borrowing costs. He spoke after lawmakers resolved the fiscal standoff that had threatened to lead to a government default.

“Bonds are, to some extent, supported by the fact that the government shutdown has weighed on U.S. growth,” BNP Paribas SA strategists including Patrick Jacq in Paris, wrote today in a note to clients. “As the Fed’s policy is data dependent, the impact of the shutdown may lead to the expected timing of the start to Fed tapering being pushed back further.”

BNP predicts German 10-year yields will increase to 2.10 percent by the middle of 2014, according to data compiled by Bloomberg. The benchmark rate will climb to 2.16 percent by June 30, according to a Bloomberg survey of analysts with the most recent forecasts given the heaviest weightings.

Most Volatile

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

Italy’s 10-year yield fell three basis points to 4.17 percent after reaching 4.15 percent, the lowest since Aug. 13.

The nation’s benchmark yield has dropped from as high as 4.66 percent on Sept. 30 as Italian Prime Minister Enrico Letta won a confidence vote in parliament, enabling him to press on with structural reforms. The government will bear 2.5 billion euros of the cuts and regional administrations will deliver 1 billion euros, Letta said this week after his cabinet approved next year’s budget on Oct. 15.

Austria, France, Spain and Italy are scheduled to redeem around 68 billion euros of government debt over next two weeks, according to data compiled by Bloomberg.

German bonds lost 2 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spanish securities returned 9.4 percent and Italy’s gained 5.9 percent.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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

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