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German Two-Year Notes Fall After GfK Shows Sentiment to Climb

German two-year notes fell after a report showed consumer confidence in the nation will rise next month as economic growth accelerated and unemployment dropped.

Declines drove the 10-year bund yield to the highest in more than two months. GfK’s consumer sentiment index, based on a survey of 2,000 people, will climb to 3.9 from a revised 3.6 in July, the Nuremberg-based market research company said today. Economists expected the index to remain unchanged at this month’s initial reading of 3.5 points. Spain’s borrowing costs fell at a 3.4 billion-euro ($4.4 billion) Treasury bill sale.

“The consumer confidence data adds to the negative tone for bunds, especially short-dated maturities,” said Peter Chatwell, an interest-rate strategist at Credit Agricole Corporate & Investment Bank in London.

The yield on the two-year note rose five basis points to 0.88 percent as of 4:55 p.m. in London. The 0.5 percent security due June 2012 fell 0.09, or 90 euro cents per 1,000-euro ($1,300) face amount, to 99.29.

The economic data is fortifying the effect of a report last week that showed Europe’s banking industry will be able to withstand a deepening of the sovereign-debt crisis. Only seven of 91 European banks examined by regulators failed the so-called stress tests.

“Risk appetite has improved following the stress tests, and that’s weighing on bunds,” Chatwell said.

Household Loans

Loans to households and companies in Europe grew at the fastest pace in 20 months in June, the European Central Bank said today.

Lending to the private sector rose 0.3 percent from a year earlier after growing 0.2 percent in May, the Frankfurt-based central bank said today. That’s the strongest increase since October 2008. M3 money supply, which the ECB uses as a gauge of future inflation, increased an annual 0.2 percent in June after contracting 0.1 percent in May.

The yield on the bund, Europe’s benchmark government security, gained one basis point to 2.77 percent. It reached 2.79 percent earlier, the highest since May 20, according to Bloomberg generic data.

Italy sold 9 billion euros of six-month treasury bills and 2.5 billion euros of zero-coupon securities due 2012. The six-month bill sale attracted bids 1.98 times the amount on offer. That compared with a so-called bid-to cover ratio of 1.6 at the auction of similar securities on June 25.

The Netherlands sold 715 million euros of 2028 bonds at a yield of 3.36 percent and 300 million euros of 2015 notes at 1.94 percent.

Shine Comes Off

“We’d estimated two billion” euros in total for the Netherlands sales, said Steve Mansell, a director of interest-rate strategy at Citigroup Corp. in London. “The Netherlands, up until recently, has been grouped with bunds as a relative safe-haven trade, and perhaps some of the shine has come off the demand for that market.”

Spain sold 971.4 million euros of three-month bills at an average rate of 0.672 percent, compared with a yield of 0.913 percent at an auction in June, the Treasury said. It also sold 2.46 billion euros of six-month debt at an average rate of 1.144 percent, down from 1.577 percent last month.

The Spanish bill auctions were “extremely well-covered,” according to Credit Agricole CIB’s Chatwell.

The yield on the Spanish 10-year bond fell 9 basis points to 4.17 percent, sending the yield premium, or spread, investors demand to hold the securities instead of bunds down 11 basis points to 137 basis points, the least since May 19.

Portugal is scheduled to sell up to 1.25 billion euros of debt maturing 2014 and 2023 tomorrow, while Italy plans to sell inflation-protected securities due 2021 and 2041.

German bonds have returned 5.9 percent this year, compared with a 6.1 percent gain for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Dutch debt rose 5.9 percent, while Italian bonds have gained 2.1 percent, the indexes showed. Spanish securities have returned 0.7 percent.

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