German Bonds Fall as Safety Demand Wanes; ECB Buys Italian Debt

German 10-year bunds fell for a second day as stocks gained and a Chinese official said his nation may invest in countries affected by the region’s debt crisis, reducing demand for safer assets.

Italian government bonds advanced for the first time in five days as the European Central Bank was said to buy the country’s debt in a bid to stop borrowing costs from rising. German two-year notes dropped as the nation sold 4.1 billion euros ($5.6 billion) of the securities. Greek 10-year bonds slid for a ninth day, pushing yields above 25 percent, amid speculation the nation will default.

“Risk aversion is coming down,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “Equities are recovering and that means the flight into safe-haven assets like bunds is also coming down. The bund yield is still at very low levels. There is some support for Italian and Spanish bonds and this has a lot to do with the ECB.”

Ten-year bund yields climbed seven basis points to 1.86 percent at 4:28 p.m. in London, after dropping to a record 1.679 percent yesterday. The 2.25 percent security due in September 2021 fell 0.630, or 6.30 euros per 1,000-euro face amount, to 103.495. Two-year yields rose four basis points to 0.54 percent.

The Stoxx Europe 600 Index advanced for a second day, gaining 1.4 percent.

Chinese Support

U.S. Treasury Secretary Timothy F. Geithner told a conference in New York today “there is no chance that the major countries of Europe will let their institutions be at risk in the eyes of the market.”

German Chancellor Angela Merkel and French President Nicolas Sarkozy will send a “clear signal” to Greece today on the need to meet deficit-cutting goals, German Economy Minister Philipp Roesler said at a news conference in Rome. The leaders will hold a conference call with Prime Minister George Papandreou at around 7 p.m. Greece time.

China’s Caijing magazine cited Zhang Xiaoqiang, a vice chairman of the National Development and Reform Commission, as saying the country remains willing to buy the debt of nations affected by the sovereign debt crisis.

Bund yields have dropped more than a percentage point in the past three months as investors sought the relative safety of top-rated government securities after the region’s debt crisis deepened and data showed the U.S. recovery is slowing.

ECB Buying

Italian 10-year bond yields dropped nine basis points to 5.62 percent, after earlier climbing to 5.77 percent, the highest level since Aug. 5. Two-year yields fell 11 basis points to 4.53 percent.

The ECB bought the nation’s government bonds according to five people with knowledge of the transactions, who asked not to be identified because the deals are confidential. A spokesman for the Frankfurt-based central bank declined to comment.

“We’ve seen quite a worrying increase in Italian yields in the past few weeks and that means the volumes that the ECB will have to purchase is increasing,” said Michael Leister, a fixed-income strategist at WestLB AG in London. “The ECB doesn’t seem to be willing to buy in the amounts necessary to stabilize Italian and Spanish yields in the 5 percent area.”

Spain’s bonds gained amid speculation the ECB will buy more of the securities after it started purchasing Italian and Spanish debt on Aug. 8. Ten-year yields declined two basis points to 5.36 percent, and two-year rates fell 11 basis points to 3.76 percent.

German Auction

The ECB said on Sept. 12 it settled 14 billion euros ($19.2 billion) of bond purchases last week, up from 13.3 billion euros the previous week. Germany’s Juergen Stark resigned from the ECB’s Executive Board on Sept. 9 in protest at the purchases, which he says blur the line between monetary and fiscal policy by lowering borrowing costs for distressed governments.

Germany sold its two-year notes at an average yield of 0.51 percent, compared with 0.73 percent at the previous auction on Aug. 17. Demand from investors increased to 1.8 times the amount on offer from 1.4 times.

The auction showed “robust demand” for short-maturity German securities, even in the “current ultra-low yield environment,” WestLB’s Leister wrote in an e-mail.

French two-year notes declined as the nation prepared to sell securities maturing in 2013, 2014 and 2016 tomorrow. It also plans to auction inflation-linked bonds due in 2019 and 2022. The two-year yield increased five basis points to 1.08 percent, and the 10-year yield climbed seven basis points to 2.66 percent. Spain also plans to sell bonds tomorrow.

Halt Payments

Greece should halt payments on its debt to stop a deterioration of the economy that threatens the European Union, said Mario Blejer, who managed Argentina’s central bank in the aftermath of the world’s biggest sovereign default.

Ten-year Greek yields climbed 118 basis points to 25.65 percent, after earlier reaching a euro-era record 26.46 percent. Two-year yields surged as much as 779 basis points, or 7.79 percentage points, to a record 84.52 percent, before settling at 75.43 percent.

German government bonds have returned 8 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Treasuries gained 8.2 percent. Greek bonds have lost 42 percent and Italian bonds have declined 3.9 percent, the indexes show.