German 10-Year Bonds Advance as North Africa Unrest Escalates

German 10-year government bonds rose as concern that North African and Middle East turmoil may escalate spurred demand for the safest assets.

Two-year notes headed for their biggest weekly decline since Jan. 14 after European Central Bank President Jean-Claude Trichet said yesterday it’s “possible” that central bank policy makers may increase rates at their April meeting. Greek two-year yields jumped to the highest since May 10, when the European Union and the International Monetary Fund created a 750 billion-euro ($1 trillion) bailout fund to backstop the euro.

“Geopolitical risk is still hanging over the market in general,” said Orlando Green, assistant director of capital-markets strategy at Credit Agricole Corporate & Investment Bank in London. “That’s good news for high-quality bonds.”

The yield on the 10-year bund fell five basis points to 3.27 percent as of 5:03 p.m. in London. The two-year note yield was little changed at 1.76 percent, bringing the gain in the week to 22 basis points.

Libyan rebel forces said they took control of the airport in Ras Lanuf, where the country’s biggest oil refinery and one of its main tanker terminals are located, according to Al Arabiya television.

Greece’s two-year yields climbed 53 basis points to 15.44 percent, while the yield difference, or spread, between Greek 10-year debt and German securities of similar maturity increased to 901 basis points, the most since Jan 11.

Labor Report

German 10-year bunds stayed higher as a U.S. labor market report showed employers added 192,000 workers last month, after a revised 63,000 gain in January. That was less than the 196,000 predicted by economists in a Bloomberg News survey. The report also showed the jobless rate decreased to 8.9 percent from 9 percent a month earlier.

The yield difference, or spread, between German two-year notes and U.S. securities of the same maturity, was at 108 basis points. It reached 109 basis points yesterday, the highest since December 2008, as traders added to bets that the ECB will raise borrowing costs before the Federal Reserve.

“We are seeing consolidation at substantially increased yield levels,” on the German bonds, said Kornelius Purps, an interest-rate strategist at UniCredit SpA in Munich. “The market has priced in three interest rate hikes by the end of the year.” UniCredit has “penciled in a rate of about 2.5 percent by the end of this year,” on the two-year, he said.

Rate Support

Morgan Stanley strategists, headed by Laurence Mutkin in London, predict the two-year German yield will rise above 2 percent by June, according to a note published today.

ECB Executive Board members Jose Manuel Gonzalez-Paramo and Lorenzo Bini Smaghi signaled today they may support raising interest rates next month.

An increase in April is “possible but not certain,” Gonzalez-Paramo told reporters in Cape Town today. “Clearly the risks to inflation are on the upside and it is the mission of the ECB to prevent those from materializing, so we are ready.”

Bini Smaghi said in Paris today that a failure to lift borrowing costs in response to faster headline inflation would make the monetary policy stance “more accommodative” and “over time fuel core inflation.”

Trichet said the central bank may raise borrowing costs next month to prevent faster inflation becoming entrenched after the rate accelerated to 2.4 percent in February, the third consecutive month it has breached the ECB’s 2 percent limit.

Implied Yield

“Trichet was pretty clear that there would be a hike come April, so that’s going to underpin the German front end going forward,” said Eric Wand, a rates strategist at Lloyds Bank Corporate Markets in London.

Euribor futures fell, pushing the implied yield on the contract expiring in December 2011 up one basis point to 2.175 percent. Earlier it rose to 2.215 percent, the highest since Feb. 22, 2010.

Forward contracts on the euro overnight index average, or Eonia, signal investors think the ECB will increase the key rate 25 basis points by its July meeting, Deutsche Bank AG data shows.

The ECB’s anti-inflation stance comes as European Union leaders approach a March 25 deadline for a reinforced plan to aid debt-strapped countries.

Since the end of January, Greece’s 10-year bonds have risen on six trading days and fallen on 18. They declined for the seventh-straight day today, pushing the yield up 18 basis points to 12.26 percent, the highest since Jan. 11.

The yield difference between German two-year notes and Greek securities of a similar maturity was 13.53 percentage points, the widest since May 7, according to data compiled by Bloomberg.

German government bonds handed investors a loss of 2.3 percent this year, compared with a 0.7 percent loss for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek debt returned 1.7 percent over the same period, the indexes showed.

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