Germany’s bonds rose as U.S. payrolls increased at the slowest pace since January 2011 and after the European Central Bank said it planned to keep interest rates low for a prolonged period to support the recovery.
Benchmark 10-year bunds headed for a second weekly gain as Standard & Poor’s affirmed Germany’s AAA credit rating. French securities rose after a report showed industrial production increased more in November than economists forecast, while Italian bonds also advanced. ECB President Mario Draghi yesterday strengthened his pledge to keep borrowing costs low for an extended period.
“I doubt this one report will change the perception about the economic recovery in the U.S., but I can understand why the bond market reacted in this way,” said Peter Osler, head of rates strategy at broker Marex Spectron Group Ltd. in London. “The ECB has made it clear interest rates in the euro zone will stay low for a long time. We see no risk of them rising any time soon.”
Germany’s 10-year yield dropped seven basis points, or 0.07 percentage point, to 1.85 percent as of 4:32 p.m. London time, having declined 10 basis points this week, the most since the period ended Sept. 27. The 2 percent bund due in August 2023 rose 0.595, or 5.95 euros per 1,000-euro ($1,367) face amount, to 101.33.
The 74,000 gain in U.S. payrolls, less than the most pessimistic projection in a Bloomberg survey of economists, followed a revised 241,000 advance the prior month, Labor Department figures showed in Washington. The median forecast called for an increase of 197,000. The unemployment rate dropped to 6.7 percent, the lowest since October 2008, as more people left the labor force.
S&P kept its outlook for Germany at stable, citing the nation’s “highly diversified and competitive economy” as well as the government’s track record for “prudent fiscal policies.” The company expects an orderly resolution of the “simmering debt crisis” in parts of the euro region, it said today in a statement.
“It would be a surprise if S&P didn’t affirm Germany’s AAA status as the country’s fundamentals are solid,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Germany’s economic outlook argues for higher yields, but some people may be buying on a tactical basis given a recent pick-up in rates and reinvestment flows from bond redemptions.”
Germany this week repaid 24 billion euros on 10-year bunds that matured Jan. 4, according to data compiled by Bloomberg.
Bond markets often disregard rating and outlook changes. France’s 10-year yield, which was 3.08 percent when S&P removed its top rating in January 2012, dropped to a record 1.659 percent in May 2013.
Moody’s Investors Services is scheduled to review Portugal’s sovereign debt rating today after the nation yesterday sold 3.25 billion of five-year securities via banks in its first bond offering since May.
Moody’s affirmed Portugal’s debt rating at Ba3 on Nov. 13, three levels below investment grade. The outlook was revised to stable from negative.
Portugal’s 10-year yield dropped four basis points to 5.35 percent after falling to 5.24 percent on Jan. 8, the lowest since May 23. Two-year rates also slid four basis points, to 2.05 percent.
“The Governing Council strongly emphasizes that it will maintain an accommodative stance of monetary policy for as long as necessary,” Draghi said yesterday in Frankfurt after policy makers held the central bank’s benchmark interest rate at a record-low 0.25 percent. The use of “firmer words” in the introductory remarks “reiterates our decisiveness to act if needed,” he said.
France’s industrial output rose 1.3 percent from October when it contracted 0.3 percent, according to data from Paris-based INSEE. The median estimate in a Bloomberg survey of analysts was for a 0.4 percent increase.
French 10-year yields dropped six basis points to 2.51 percent. The rate on similar-maturity Italian bonds fell one basis point to 3.92 percent. Spain’s 10-year yield was little changed at 3.81 percent after declining to 3.67 percent yesterday, the lowest since September 2006.
Spain’s two-year rate was at 1.01 percent after sliding to 0.953 percent yesterday, the lowest since Bloomberg began collecting the data in 1993. The five-year note yielded 2.31 percent after falling to as low as 2.213 percent yesterday.
“Peripheral bonds have come a long way and may be vulnerable to profit taking,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S in Copenhagen. “We remain bullish longer term as we think things will improve further. Shorter term, the gain looks a bit overdone.”
Volatility on French bonds was the highest in euro-area markets today, followed by those of Austria and the Netherlands, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.
German bonds lost 1 percent in the past year through yesterday, the worst performer of 15 euro-area sovereign-debt markets tracked by Bloomberg World Bond Indexes. Spanish and Portuguese securities both returned 12 percent.
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