German Two-Year Notes Decline as Euro-Region Inflation Quickens

German two-year notes fell after a report showed euro-region inflation accelerated in April to the fastest pace in two and a half years, bolstering the case for the European Central Bank to raise interest rates.

Greek bonds dropped, extending their sixth consecutive weekly decline, amid speculation the nation will need to restructure its debt. Inflation in the 17-nation euro region quickened to 2.8 percent from 2.7 percent in March, the European Union’s statistics office in Luxembourg said today. Economists expected inflation to remain unchanged, according to the median of 34 forecasts in a Bloomberg News survey. Traders added to bets that policy makers will increase borrowing costs.

“Inflation concerns, and therefore the rate outlook for the ECB, have become more aggressive, particularly with the rate we’ve just seen,” said Kornelius Purps, a strategist at UniCredit SpA in Munich. “There’s definitely more potential for higher rates, particularly in the short-end.”

The two-year note yield climbed two basis points to 1.79 percent as of 3:43 p.m. in London. The 1.5 percent security due March 2013 fell 0.04, or 40 euro cents per 1,000-euro ($1,484) face amount, to 99.47. The 10-year bund yield was little changed at 3.26 percent. It dropped to 3.20 percent yesterday, the least since March 24.

An index of executive and consumer sentiment in the euro region slipped to 106.2 from 107.3 in March, the sharpest drop since May 2010, and unemployment held at 9.9 percent, separate reports showed.

Greek Bonds Slide

Greek two-year yields rose back above 26 percent, while 10-year yields reached 16 percent, both approaching euro-era all-time highs.

Greek two-year yields surged as much as 109 basis points to 26.01 percent before retreating to 25.37 percent, 2.36 percentage points higher in the week. Ten-year yields gained as much as 31 basis points today to 16.01 percent, before sliding to 15.70 percent, a weekly gain of 80 basis points. The five-year security’s yield rose 15 basis points today.

Portuguese 10-year yields jumped 10 basis points to 9.76 percent, the highest since at least 1997, when Bloomberg began collecting the data, before slipping three basis points to 9.63 percent. Two-year yields were little changed at 11.98 percent.

“There are still concerns over the possibility of a Greek default or restructuring,” Purps said. “That’s hammering the periphery, and we see that in spread-widening over the past two weeks or so.”

Greece’s two-year note yields have added more than 1,000 basis points, or 10 percentage points, this month, while Portugal’s have gained more than 300 basis points. Ireland’s have risen more than 200 basis points over the period.

Portugal Bailout

Earlier this month, Portugal became the third euro-region country to seek an international bailout after Greece sparked a sovereign-debt crisis that threatened to splinter the currency bloc a year ago and then engulfed Ireland.

The extra yield, or spread, investors demand to hold Greek 10-year bonds instead of similar-maturity German bunds widened as much as 31 basis points today to 1,275 basis points. It reached 1,307 on April 27, the most since at least March 1998, according to data compiled by Bloomberg.

German retail sales decreased 2.1 percent from February, when they fell 0.4 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a 0.2 percent gain, according to the median of 18 estimates in a Bloomberg News survey. From a year earlier, sales declined 3.5 percent.

ECB Rates

The ECB increased its benchmark rate by 25 basis points to 1.25 percent at their April 7 meeting to keep a lid on price pressures. The central bank is balancing the need for higher borrowing costs in countries such as Germany against soaring bond yields in the region’s most-indebted nations. Policy makers meet again on May 5.

Euribor futures fell, pushing the implied yield on the December contract two basis points higher to 2.05 percent as traders added to bets that the ECB will raise borrowing costs. The rate has climbed from 1.33 percent on Dec. 31.

Spanish 10-year bonds advanced for a third day, pushing the yield down by 10 basis points to 5.29 percent, even as reports showed unemployment, the highest in Europe, rose more than forecast, inflation accelerated and retail sales plunged.

Joblessness rose to 21.3 percent in the first quarter, the National Statistics Institute said today in Madrid, compared with 20.3 percent in the previous three months and a median forecast of 20.7 percent in a Bloomberg News survey.

Consumer prices rose 3.5 percent in April from a year earlier, based on a European Union measure, after increasing 3.3 percent in March. Retail sales fell 8.6 percent in March from a year earlier, the steepest decline in two years, INE said.

France plans to sell as much as 9.5 billion euros of securities on May 5, according to Agence France Tresor.

German government bonds have handed investors a loss of 1.7 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. U.S. Treasuries have returned 1 percent. Greek debt lost 12 percent, with Portuguese securities losing 15 percent, the indexes show.

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