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German Bonds Fall as Bailout Fund Sells Bills, Confidence Rises

German bonds declined, pushing two-year yields up by the most in a week, after Europe’s bailout fund sold the maximum amount of bills at its first auction of the securities.

Two-year yields climbed from near a record low as a German report showed investor confidence in Europe’s biggest economy unexpectedly increased this month, damping demand for safer assets. Italian two-year notes rose for a third day as the European Central Bank was said to buy the securities. Spanish notes advanced after the nation sold more bills than its maximum target at an auction.

“There’s a general improvement in sentiment and that weighs on bunds,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “There’s some relief that the Spanish bill auction results were good, and that’s given peripheral debt a bit of a bid.”

The German two-year yield rose three basis points, or 0.03 percentage point, to 0.28 percent at 4:28 p.m. London time after climbing five basis points, the most since Dec. 5. It dropped to a record 0.247 percent yesterday. The 0.25 percent note due December 2013 fell 0.055, or 55 euro cents per 1,000-euro ($1,308) face amount, to 99.94. Ten-year rates climbed two basis points to 2.04 percent.

Germany plans to sell 5 billion euros of benchmark two-year notes tomorrow.

German securities pared declines after Reuters reported that Chancellor Angela Merkel rejected raising the upper limit of funding for the European Stability Mechanism, the permanent bailout fund slated to start next year.

‘Decent Amount’

The European Financial Stability Facility issued 1.97 billion euros of 91-day bills at an average yield of 0.2222 percent, the Bundesbank said. Investors bid for 3.2 times the amount sold. The EFSF sells debt to finance rescue loans extended to Europe’s high debt and deficit nations.

The yield compared with a rate of about zero on similar-maturity German and Dutch bills.

“With three-month EFSF bills yielding a decent amount above where Dutch bills trade, it was no surprise that some excess cash found its way there,” Lloyds Bank’s Wand said.

The ZEW Center for European Economic Research said its index of German investor and analyst expectations, which aims to predict economic developments six months in advance, rose to minus 53.8 from a three-year low of minus 55.2 in November. Economists forecast a drop to minus 55.8, according to a Bloomberg News survey.

Bill Sales

Italian notes reversed an earlier drop as four people with knowledge of the transactions said the ECB bought the nation’s securities. The people declined to be identified because the deals are confidential. A spokesman for the Frankfurt-based central bank declined to comment.

The nation’s two-year yields dropped 17 basis points to 5.68 percent after earlier rising as much as 28 basis points. Five-year yields rose seven basis points to 6.82 percent before Italy sells up to 3 billion euros of 4.75 percent securities maturing in September 2016 tomorrow.

Spain’s two-year notes gained for a third day after the nation sold 4.94 billion euros of 12-month and 18-month bills, more than the maximum target of 4.25 billion euros the Treasury set for the sale. Demand for the 12-month securities rose to 3.14 times the amount sold, compared with 2.13 last month, and the bid-to-cover ratio for the longer-maturity bills was 4.97 times versus 5.96.

Yields on the notes dropped 31 basis points to 4.17 percent, after falling 44 basis points in the previous two days.

Fitch, Moody’s

Greece sold 1.625 billion euros of 26-week bills with a uniform yield of 4.95 percent, the Public Debt Management Agency said. Investors bid for 2.93 times the amount on offer.

“Notwithstanding the weakness of periphery secondary markets, bills auctions have been performing well, perhaps thanks to domestic support,” Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London, wrote in an e-mailed report. “We’re still not clear how the bond auctions will go, but the evidence is that there is some demand somewhere.”

Ten-year bund yields declined the most in six weeks yesterday as Fitch Ratings joined Moody’s Investors Service and Standard & Poor’s in warning it may cut the credit ratings of European nations.

Euro-area leaders agreed last week on a blueprint for closer fiscal union in the currency bloc, seeking to prevent Spain and Italy from being engulfed by troubles that forced Greece, Ireland and Portugal to seek bailouts.

German bonds have returned 8.5 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Spanish securities gained 2.3 percent, while Greek debt tumbled 63 percent, the indexes show.

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