Germany’s Bonds Lead Declines in Europe Amid Fed Tapering Bets

Germany’s government bonds led declines among the euro region’s sovereign securities as a U.S. job report boosted speculation the Federal Reserve will bring forward a reduction in its asset-purchase program.

Ten-year bund yields climbed to the highest in six weeks after euro-area data confirmed the region’s economy expanded for a second quarter, reducing demand for Europe’s benchmark debt. Demand fell as Germany auctioned 3.3 billion euros ($4.5 billion) of five-year notes. Italian 10-year bonds slid for a fourth day, the longest losing streak since July. The U.S. Labor Department will release its November jobs report on Dec. 6.

“Investors are fearing better nonfarm payrolls data on Friday would definitely put Fed tapering back on the agenda,” said Alexander Aldinger, a fixed-income strategist at Commerzbank AG in Frankfurt. “This is broadly the reason why bunds are lower and the periphery is selling off. The European data today is secondary.”

Germany’s 10-year yields climbed nine basis points, or 0.09 percentage point, to 1.81 percent at 4:19 p.m. London time, the highest level since Oct. 22. The 2 percent bund maturing in August 2023 fell 0.765, or 7.65 euros per 1,000-euro face amount, to 101.67. The nation’s five-year yield increased eight basis points to 0.76 percent.

Sell Recommendation

U.S. companies boosted payrolls by 215,000 in November, the most in a year, according to figures from the ADP Research Institute in Roseland, New Jersey. The median forecast of economists surveyed by Bloomberg was for an increase of 170,000. The Labor Department data will show the economy added 180,000 jobs last month, according to the median estimate of analysts surveyed by Bloomberg.

Investors should sell bunds, along with Treasuries, gilts, gold, the Swiss franc and the yen, or “anything which used to be safe,” as the Fed begins to phase out its asset-purchase stimulus program, Erik Nielsen, global chief economist for UniCredit SpA, said in Istanbul.

The U.S. central bank will “very likely” begin reducing its $85 billion per month of Treasury and mortgage-backed securities in January, according to Nielsen who spoke before the ADP report.

Euro-area gross domestic product rose 0.1 percent in the third quarter after a 0.3 percent gain in the previous three months, in line with an initial Eurostat estimate. A composite gauge of manufacturing and services in the region grew for a fifth month in November, according to Markit Economics.

‘Short Bunds’

“I’d rather be short bunds at the moment,” said Peter Schaffrik, head of European interest-rate strategy at Royal Bank of Canada in London, referring to bets that bund prices will decline. “We don’t think the euro-area economy is going to fall back into recession and 2014 is going to look slightly better.”

European Central Bank policy makers will leave their key rate at a record-low 0.25 percent when they meet in Frankfurt tomorrow, a Bloomberg survey of analysts shows. The German 10-year yield dropped six basis points after the ECB unexpectedly cut the refinancing rate by 25 basis points on Nov. 7.

Germany sold notes due in October 2018 at an average yield of 0.68 percent, compared with 0.71 percent at a previous auction on Nov. 6. Investors bid for 1.6 times the securities allotted, down from 2.3 times last month.

Volatility Gauge

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

Dutch 10-year yields rose seven basis points to 2.11 percent. The additional yield investors demand to hold the securities instead of German bunds declined for a third day to as little as 30 basis points, the least since May 24.

Italy’s 10-year yield climbed six basis points to 4.15 percent, the highest since Nov. 13. The rate on similar-maturity Spanish bonds rose five basis points to 4.19 percent.

Spain is scheduled to auction as much as 3.5 billion euros of four- and five-year notes tomorrow. The Madrid-based Treasury last sold the securities due in 2018 on Nov. 7 at an average yield of 2.871 percent, down from 3.059 percent at a previous sale on Oct. 17.

France plans to sell up to four billion euros of debt maturing between 2018 and 2027 tomorrow.

German securities lost 1.1 percent this year through yesterday, the worst performer among 15 euro-area sovereign-debt markets tracked by Bloomberg World Bond Indexes. Spain’s returned 11 percent and Italy’s earned 7.5 percent.

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