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German 10-Year Yields Fall to Record on ECB; Italian Bonds Drop

German 10-year bund yields fell to a record low after European Central Bank President Jean-Claude Trichet said “downside risks” to the economy have intensified and inflation concerns had eased.

Italian bonds declined after the nation’s Senate approved a revised 54 billion-euro ($75.6 billion) austerity plan as the government seeks to convince investors it’s serious about cutting its deficit. French bonds gained as the ECB cut its euro-area economic growth forecasts for this year and next. The euro-region’s economy faces “particularly high uncertainty,” Trichet said at a press conference in Frankfurt after the ECB kept its benchmark interest rate at 1.5 percent.

“Trichet said the risks have ‘intensified’ and the staff forecasts for 2012 have been revised down,” said Eric Wand, a bond strategist at Lloyds Bank Corporate Markets in London. “We are seeing buyers of bunds coming in. This sort of talk should support intermediate to longer-dated AAA core product.”

Ten-year bund yields fell to a record 1.823 percent as Trichet spoke, before being two basis points lower at 1.89 percent at 4:13 p.m. in London. The 2.25 percent securities maturing September 2021 rose 0.185, or 1.85 euros per 1,000-euro ($1,406) face amount, to 103.275. Two-year notes dropped three basis points to 0.46 percent. They declined to an all-time low 0.417 percent Sept. 6.

Euribor futures rose, pushing the implied yield on the contract expiring in June down five basis points to 1.02 percent, signaling traders added to wagers for lower borrowing costs. It earlier fell to 0.97 percent, the least since Aug. 19.

Forecasts Cut

Trichet said the ECB now forecast growth this year of 1.4 percent to 1.8 percent, down from an earlier prediction of 1.5 percent to 2.3 percent. Growth next year will be 0.4 percent to 2.2 percent, lowered from 0.6 percent to 2.8 percent, he said. Inflation forecasts were unchanged.

“Trichet toned down the hawkish language modestly, laying the ground for a softer approach from the ECB over the coming months,” Stewart Robertson, senior economist at Aviva Investors, said in an e-mailed note. “Rate rises now look off the cards, and markets have begun to price in interest-rate reductions over the next year,” he said.

A Credit Suisse Group AG index shows traders are betting the ECB will lower its refinancing rate by 29 basis points over the next 12 months. As recently as Aug. 1, they forecast an increase of 25 basis points.

French Bonds

French 10-year bond yields dropped eight basis points to 2.59 percent, and Belgium’s 10-year yields declined 11 basis points to 3.93 percent.

The European debt crisis is sapping confidence in banks and driving up market borrowing costs, prompting economists such as Nouriel Roubini and Nobel Prize winner Joseph Stiglitz to urge the ECB to reverse this year’s rate tightening.

The Bank of England today kept its key rate at a record low of 0.5 percent today, and maintained its bond-purchase program at 200 billion pounds ($321 billion).

Italian bonds dropped for the first time in three days, with two-year yields climbing three basis points to 3.90 percent, and 10-year rates rising two basis points to 5.28 percent. Italy’s revised austerity package is of “extreme importance,” Trichet said.

The ECB began buying Italian and Spanish bonds on Aug. 8 to curtail a surge in yields as contagion from the debt crisis that engulfed Greece, Ireland and Portugal spread to the euro region’s third- and fourth-largest economies.

‘Too High’

Europe’s policy makers have called on politicians from both nations to trim their budget deficits and restore market confidence. Italy’s sovereign debt is “too high” and the country must make massive efforts to cut its deficit, German Finance Minister Wolfgang Schaeuble said today in an interview on Deutschlandfunk radio.

Spain’s two-year yields were little changed at 3.42 percent. Ten-year rates rose two basis points to 5.03 percent.

Greek two-year note yields jumped as much as 85 basis points to a euro-era record 55.76 percent. The nation’s 10-year yield climbed to an all-time high 20.13 percent.

Trichet told reporters it would be “an enormous mistake” for Greece not to cut its deficit.

Irish 10-year bond yields rose five basis points to 8.73 percent, down from a euro-era record 14.22 percent reached on July 15. Irish debt handed investors a return of 21 percent this quarter, the best performer among euro-denominated government bonds, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg.

German government bonds have returned 7.1 percent this year, the indexes show. Treasuries gained 8 percent, Greek debt lost 30 percent, and Italian bonds declined 1.1 percent, according to the indexes.

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