France-Germany Yield Spread Widens as French Growth Trails Peers

The extra yield investors demand to hold France’s 10-year debt over similar-maturity German bonds increased for a third day on signs the French recovery is trailing its regional peers.

France’s five-year notes yielded the most relative to equivalent-maturity German debt in more than a week after the nation sold 7.9 billion euros ($10.8 billion) of debt due between 2016 and 2019, and inflation-linked securities. Moody’s Investors Service is due to give an update of its sovereign ratings for France tomorrow. German 10-year yields fell to a seven-week low as a survey showed Chinese manufacturing unexpectedly contracted. Portuguese and Irish bonds declined.

“We are back to levels which are pointing to the relative performance of France versus Germany,” said Patrick Jacq, a fixed-income strategist at BNP Paribas SA in Paris. “Unless France improves its economic and fiscal performance, it will be very difficult to see the spread tightening further. Today there was supply in France and therefore there’s been some concession in the market.”

French five-year yields fell one basis point, or 0.01 percentage point, to 1.09 percent at 4:37 p.m. London time, while the rate on similar-maturity German debt dropped three basis points to 0.81 percent. France’s 1 percent note maturing in November 2018 climbed 0.03, or 30 euro cents per 1,000-euro face amount, to 99.59. The 28 basis-point yield gap is the widest since Jan. 14.

The yield difference, or spread, between benchmark 10-year French and German bonds increased one basis point to 70 basis points after touching 71 basis points, the most since April 3 on a closing-market basis. The French bond is due in May 2024 and the German in August 2023.

French Manufacturing

A gauge of French manufacturing output, based on a survey of purchasing managers, showed the industry failed to expand for the 30th month in January. A separate Markit Economics report showed an index of German manufacturing activity rose to the highest in more than 2 1/2 years. Markit’s composite gauge of euro-area manufacturing and services output rose to 53.2, from 52.1 in December.

Germany’s benchmark 10-year yield dropped four basis points to 1.71 percent after touching 1.70 percent, the least since Dec. 2.

“We’ve seen a correction higher for the bund in January,” said Mathias Van Der Jeugt, a research analyst at KBC Bank NV in Brussels. “At 1.70 percent on the 10-year bund we would recommend a new short bund position. We don’t think the correction will go further.”

A short position is a bet that an asset’s yield will rise.

French Sale

France allotted 3.82 billion euros of a new security due in May 2019 at an average yield of 1.24 percent, compared with 1.02 percent at a previous auction on Nov. 21. The nation also sold 1.89 billion euros of four-year debt as well as 2.225 billion euros of notes maturing in April 2016.

The Paris-based Treasury also sold a combined 1.7 billion euros of inflation-linked debt maturing between 2016 and 2024.

The gauge based on a survey of purchasing managers in China’s manufacturing industries fell to 49.6 this month from 50.5 in December according to preliminary data released today by HSBC Holdings Plc and Markit Economics, below the 50 level that separates expansion from contraction.

The Markit Economics preliminary index of U.S. manufacturing decreased to 53.7 in January from 55 a month earlier, the London-based group said.

Portugal’s 10-year yield rose 10 basis points to 5.16 percent, ending a nine-day run of lower borrowing costs. Irish 10-year yields increased two basis points to 3.30 percent.

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

France’s bonds returned 0.7 percent this year through yesterday, the second-worst performance in 15 European bond markets tracked by Bloomberg World Bond Indexes. Germany’s rose 0.9 percent and Portugal’s earned 6.2 percent.

Fitch Ratings is also scheduled to review Germany’s sovereign credit outlook tomorrow.

To contact the reporters on this story: Eshe Nelson in London at enelson32@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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