German Bunds Retreat as Equities Gain, Risk Appetite Improves

German bunds fell as stocks rose and a U.S. labor market report eased concern that the recovery in the world’s largest economy is faltering, damping demand for the perceived safety of government debt.

The two-year note yield rose to the highest in almost a month as the MSCI World Index of shares gained 0.9 percent. Greek government bonds advanced relative to German securities after Petros Christodoulou, director general of the Greek Debt Management Office, said the country’s debt is a “good opportunity” to “pick up good yields.” Initial jobless claims dropped by 27,000 to 451,000 in the week ended Sept. 4, Labor Department data showed today.

“The fall in bunds reflects a shift in risk sentiment,” said Orlando Green, assistant director of capital-markets strategy at Credit Agricole Corporate & Investment Bank in London. “Equities are higher and sovereign spreads are tightening a little, and it all helps the general picture that event risks are diminishing.”

The yield on the bund, Europe’s benchmark security, rose 4 basis points to 2.34 percent as of 4:14 p.m. in London. The 2.25 percent security maturing in September 2020 fell 0.37, or 3.7 euros per 1,000-euro ($1,275) face amount, to 99.25. The two-year note yield climbed 7 basis points to 0.70 percent, the highest since Aug. 12.

Bunds gained earlier after FT Deutschland cited European Central Bank chief economist Juergen Stark as saying some German banks are undercapitalized, deepening concern about the financial health of the nation’s banks. Speculation the recovery in Europe’s largest economy may be slowing helped send Germany’s bund yield to a record low last month.

Peripheral Bonds

So-called peripheral euro-region bonds gained relative to benchmark German securities, a day after a trader, speaking under condition of anonymity, said European central banks were buying Greek, Irish and Portuguese debt.

The ECB began buying bonds in May to help maintain the value of the assets as the International Monetary Fund and the European Union created a 750 billion-euro fund to shore up the single currency.

The extra yield investors demand to hold Irish 10-year debt compared with German 10-year bunds fell 19 basis points to 352 basis points. The spread reached 377 basis points yesterday, the most on record, according to Bloomberg generic data.

The Greek-German 10-year yield spread narrowed 14 basis points to 938 basis points. It rose as high as 957 basis points yesterday, 16 basis points short of the record reached on May 7.

‘Funding Hurdles’

Ireland’s National Treasury Management Agency sold 150 million euros of bills due Feb. 2011 at an average yield of 1.925 percent, compared with 1.978 percent in an Aug. 26 sale. It also sold 250 million euros of bills due April 2011, at an average yield of 2.19 percent, compared with 2.348 percent at the last sale.

“There has likely been some market relief as major funding hurdles of Portugal bonds yesterday and Irish T-bills this morning have been overcome without too many problems,” Credit Agricole’s Green said.

The Portuguese-German 10-year yield spread dropped 9 basis points to 342 basis points. It climbed to a record 372 basis points yesterday, the most since Bloomberg began compiling the data in 1997.

Portugal’s finance minister said today that his nation can’t afford to miss its deficit-reduction target. Market demand is “sufficient” for Portuguese debt, Fernando Teixeira dos Santos said at a conference in Macau, China.

The Portuguese government forecasts economic growth of 0.7 percent for this year. The government aims to narrow its deficit to 7.3 percent of GDP this year. It intends to meet the European Union limit for a gap of 3 percent in 2012, a year earlier than in a previous plan.

German bonds have returned 9.3 percent this year, compared with a 8.1 percent gain for U.S. Treasuries, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies show. Irish debt has lost 2.8 percent this year. Greek debt has lost more than 20 percent, while Portuguese securities have given up 4.9 percent.

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