German government bonds posted a weekly gain, with 10-year yields dropping to the lowest in seven months, as tension between the western nations and Russia over Crimea boosted demand for safer assets.
Benchmark 10-year yields had the biggest weekly decline since September before a referendum this weekend in Crimea as the region’s government attempts to secede from Ukraine. The extra yield investors demand to hold Italian and Spanish 10-year securities instead of German bunds increased for the first week since January even as the nations’ bonds rose today. European stocks declined.
“We’ve seen core bond markets rallying, spreads rewidening and stock markets hammered so it’s a pure flight to quality driven by fears of risk in the geopolitical situation,” said Patrick Jacq, a fixed-income strategist at BNP Paribas SA based in Paris.
Germany’s 10-year yield was little changed at 1.55 percent at the 5 p.m. close in London, having dropped 11 basis points this week, the most since the period ended Sept. 27. The rate earlier fell to 1.50 percent, the lowest since July 19. The price of the 1.75 percent bund due February 2024 was 101.86.
Concern Russia will seek to annex Crimea caused the spreads on peripheral bonds over German bunds to widen even as Bank of America Merrill Lynch indexes showed the average yield to maturity on securities from Greece, Ireland, Italy, Portugal and Spain fell to the lowest in euro-area history this week.
Russia warned that Ukraine’s government has lost control of the country, fueling concern the Kremlin will extend a military intervention as U.S. Secretary of State John Kerry called for it to halt a takeover of Crimea. The U.S. and the European Union are threatening sanctions against Russia if it doesn’t back down from annexing the Black Sea province.
The additional yield investors demand to hold Italy’s 10-year bonds over similar-maturity bunds widened nine basis points this week to 186 basis points. The spread contracted to 173 basis points on March 11, the narrowest since June 2011. The equivalent Spanish spread widened eight basis points during the same period, to 179 basis points. It shrank to 165 basis points on March 10, the least since October 2010.
Italy’s 10-year yield fell three basis points today to 3.41 percent and Spain’s slipped four basis points to 3.34 percent.
Irish bonds snapped a three-day advance with 10-year yields rising one basis point to 3.03 percent after dropping to a record 2.99 percent yesterday.
Ireland sold its first government bonds via auction since 2010 yesterday as the nation emerges from bailout measures put in place during the debt crisis and investors return to the country’s debt markets.
Investors should buy Portuguese bonds betting the nation will follow Ireland in returning to debt markets, according to Christian Lenk, a fixed-income analyst at DZ Bank AG in Frankfurt. Portugal is rated two steps below investment grade at Standard & Poor’s and three below at Moody’s Investors Service.
“Parallels are emerging between the two countries that support the hypothesis that Portugal can be expected to continue treading in Ireland’s footsteps,” Lenk wrote in an e-mailed note. “A restoration of the country’s regular primary market presence in the medium term means that Portugal could be joining the ranks of the investment grade issuers again.”
Portugal held two sales of debt via banks this year and is preparing to resume regular auctions of bonds, debt-office chief Joao Moreira Rato said in a March 5 interview in London.
Portugal’s 10-year yield fell one basis point today to 4.60 percent.
German bonds returned 2.6 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italian securities gained 4.3 percent, Spain’s 5.1 percent and Ireland’s earned 4 percent.
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