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Bunds Climb on Investor Concern Losses on Greek Debt May Mount

German 10-year bunds climbed for the fourth consecutive day as investors sought the safest assets after European governments signaled bondholders may need to take bigger losses on Greek debt in a second aid package.

German two-year notes, perceived to be among Europe’s safest debt securities, also rose as European and Asian stocks slid. European producer-price inflation weakened in August, adding to evidence growth is faltering. Greek bonds slid, while Italian bonds advanced as the European Central Bank was said to purchase the securities. Austria sold 1.1 billion euros ($1.45 billion) of 2015 and 2037 debt and Belgium auctioned bills.

“We have no clear signs of a solution to the debt crisis,” said Ralf Umlauf, head of floor research at Helaba Landesbank Hessen-Thueringen in Frankfurt. “Renewed fear of an escalation of the debt crisis is supporting bunds.”

The 10-year bund yield fell nine basis points to 1.72 percent at 4.31 p.m. in London. It reached a record low 1.636 percent on Sept. 23. The 2.25 percent security due September 2021 jumped 0.86 or 8.6 euros per 1,000-euro face amount, to 104.77. Two-year yields dropped five basis points to 0.45 percent.

Factory-gate prices in the 17-nation euro region rose 5.9 percent in August from a year earlier after a 6.1 percent increase in July, the European Union’s statistics office in Luxembourg said today. Economists had projected a gain of 5.8 percent, according to the median of 19 estimates in a Bloomberg survey.

‘Technical Revisions’

European finance ministers considered reshaping a July deal that foresaw investors contributing 50 billion euros to a 159 billion-euro rescue. That private sector involvement, or PSI, includes debt exchanges and rollovers.

“As far as PSI is concerned, we have to take into account that we have experienced changes since the decision we have taken on July 21,” Luxembourg Prime Minister Jean-Claude Juncker told reporters today after chairing a meeting of euro-area finance chiefs in Luxembourg. “These are technical revisions we are discussing.”

The ministers also pushed back a decision on the release of Greece’s next 8 billion-euro loan installment until after Oct. 13. It was the second postponement of a vote originally slated for yesterday as part of the 110 billion-euro lifeline granted to Greece last year.

‘Contagion’ Concern

“The key thing here is whether you do it for Greece only or whether there is contagion and people start to price in these moves for other countries,” said Laurent Fransolet, head of European fixed-income strategy at Barclays Capital in London. “Everybody can just about take a higher haircut on Greece, except maybe the Greek banks, but if you have that sort of contagion towards the other countries then it makes it much more difficult.”

Fransolet spoke in an interview with Owen Thomas on Bloomberg Television’s “Countdown.”

Greek two-year securities dropped, with the yield climbing 246 basis points to 64.73 percent. The 10-year yield jumped 49 basis points to 23.11 percent, driving the difference in yield with benchmark bunds 57 basis points higher to 21.38 percentage points, or 2,138 basis points.

Bailouts for Greece, Ireland and Portugal, and bond purchases by the ECB haven’t kept the debt crisis from threatening to engulf Italy and Spain. Policy makers began buying Spanish and Italian securities on Aug. 8 to curb a surge in yields, according to traders who deal with the central bank.

ECB Buying

The Frankfurt-based central bank bought Italian debt today, according to four people with knowledge of the transactions, who asked not to be identified because the trades are confidential. A spokeswoman for the ECB declined to comment.

Italian bonds rose, pushing the 10-year yield four basis points lower to 5.50 percent. The two-year note yield was little changed at 4.22 percent, with similar-maturity Spanish note yields at 3.48 percent.

Belgian two-year notes snapped a nine-day advance as Finance Minister Didier Reynders said that France and Belgium are ready to provide guarantees for the financing of Dexia SA after shares of the municipal lender plunged the most since its creation. Belgium’s biggest bank has struggled to obtain short-term funding as investors grew concerned it would have to write down the value of its sovereign-debt holdings.

Credit-Default Swaps

Volatility on Belgian sovereign debt was the highest among euro-area markets today, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. The yield change in the nation’s 10-year securities was 4.7 times the 90-day average, a Bloomberg gauge showed. The two-year yield rose 27 basis points to 2.08 percent, after dropping 60 basis points since Sept. 20.

Belgium, which has been without a full-time government for almost 16 months, today sold about 3.5 billion euros of 105- and 161-day bills.

Credit-default swaps on Germany rose four basis points to an all-time high of 122 and France increased nine to 199, approaching the record closing price of 202.5 on Sept. 22, according to CMA. French and German banks have the biggest holdings of Greek debt, according to the Basel, Switzerland-based Bank for International Settlements.

Austrian bonds rose as the nation issued debt, pushing the yield on the 10-year security down three basis points to 2.62 percent. The yield difference, or spread, between Austrian 10-year securities and similar-maturity German bunds widened to 88 basis points, the most since April 2009.

‘Easily Absorbed’

Austria issued 440 million euros of its bond maturing March 2037 at an average yield of 3.172 percent in an auction today. It last tapped the 2037 bond on Sept. 6, when it issued 660 million euros at 3.447 percent. The AAA rated nation also issued 660 million euros of its bond maturing July 2015 at an average yield of 1.502 percent. It last sold the bond on March 1, when it issued 660 million euros at 2.514 percent.

“Austrian bonds have been easily absorbed,” said Annalisa Piazza, a fixed-income strategist at Newedge Group SA in London, wrote in a note to investors. “The relative amount on offer and solid fiscal position for Austria supported today’s auction.”

German government bonds returned 7.9 percent in the third quarter, leaving them with an 8.2 percent gain in 2011, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Greek bonds tumbled 36 percent this year, with Italian debt losing 2.7 percent, the indexes showed.

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