German 30-Year Bonds Outperform as Sales Cut; Spain’s Debt Falls

German 30-year bond yields dropped to the lowest relative to 10-year bunds since October after the nation said it was reducing sales of the longer-maturity debt next year.

Spain’s bonds fell for the fourth time in five days before the nation auctions as much as 2.5 billion euros ($3.44 billion) of securities tomorrow. The extra yield on 30-year U.S. Treasuries over similar-maturity German bunds widened to the most this month as investors awaited a Federal Reserve decision on whether policy makers will reduce asset purchases that have capped borrowing costs. A measure of volatility for German 10-year bonds dropped to the lowest level in four months.

“The German curve is flattening on the back of the issuance announcement,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “There’s a bit of a bid at the longer end. There may also be some nervousness going into the Fed meeting” that is weighing on Spanish bonds, he said.

Germany’s 30-year yield was little changed at 2.67 percent at 5 p.m. London time after declining to 2.65 percent, the lowest since Dec. 4. The 2.5 percent bund due July 2044 rose 0.065, or 65 euro cents per 1,000-euro face amount, to 96.42.

The 10-year yield climbed two basis points to 1.84 percent. The spread between the securities and 30-year bonds shrank to as little as 81 basis points, the narrowest since Oct. 2. The U.S.- German 30-year spread expanded to 124 basis points, the widest since Nov. 20, based on closing prices.

German Supply

The German Federal Finance Agency said it plans to sell a combined 205 billion euros of bonds and bills next year, compared with 247 billion euros in 2013. The nation will offer 7 billion euros of 30-year bonds across three auctions, compared with 8 billion euros via four sales in 2013.

The reduced supply “reflects a combination of improved fiscal conditions and reduced redemptions profile,” Annalisa Piazza, an economist at Newedge Group in London, wrote in a note to clients.

The majority of economists surveyed by Bloomberg predict the Fed will maintain its monthly asset purchases at $85 billion today, according to a Dec. 6 survey. Thirty-four percent expect tapering will begin today, 26 percent forecast January and 40 percent said March.

Traders see an 88 percent chance the U.S. central bank will keep the federal-funds rate target at zero to 0.25 percent through 2014, data on futures compiled by Bloomberg show.

Spain, Italy

Spain’s 10-year yield climbed six basis points to 4.15 percent today, while similar-maturity Italian yields rose three basis points to 4.07 percent.

Spain is due to auction bonds maturing in 2018 and 2023 tomorrow in its final sale of 2013. The nation last sold 10-year debt on Nov. 7 at an average yield of 4.164 percent, compared with 4.269 percent at a previous auction on Oct. 3.

“The bond market is waiting for the Fed’s decision,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “If the Fed tapers today, we expect outperformance of euro region’s bonds versus Treasuries over time, especially in the front-end,” he said, referring to shorter-maturity debt.

Volatility on German 10-year yields as measured by the 65-day standard deviation, a gauge of how much the rate has moved each day compared with the average, fell to 3.51 basis points, the lowest since Aug. 12, data compiled by Bloomberg show.

German bonds handed investors a loss of 1.7 percent this year through yesterday, the worst performer of 15 euro-area debt markets tracked by Bloomberg World Bond Indexes. Spain’s returned 12 percent and Italy’s earned 7.8 percent, while Treasuries dropped 2.7 percent.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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

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