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German Bunds Rise, Spanish Bonds Drop on S&P Downgrade Reports

German bonds gained, pushing yields on five- and 30-year securities to record lows, on speculation Standard & Poor’s will affirm the nation’s AAA rating while downgrading some of its euro-area peers.

Spanish and Belgian bonds declined as investors shunned the lower-rated assets for the perceived safety of German debt. France, rated AAA, is among several euro-area countries facing downgrades in the S&P review which is due to be released later today, a European government official said on condition of anonymity. Philippa Melaniphy, a spokeswoman at S&P in London, declined to comment when reached by telephone.

“Bunds are flying in a flight to quality on reports citing a senior euro-zone source of mass downgrades, excluding the Netherlands and Germany,” said Peter Chatwell, a London-based fixed-income strategist at Credit Agricole Corporate & Investment Bank.

Germany’s 10-year yield fell seven basis points, or 0.07 percentage point, to 1.77 percent at 5 p.m. London time, after dropping to 1.74 percent, the least since Nov. 15. The 2 percent bund due in January 2022 rose 0.64, or 6.40 euros per 1,000-euro face amount, to 102.125.

The five-year yield dropped to as low as 0.733 percent, the least since Bloomberg began collecting the data in 1990. The 30-year yield slid as much as 10 basis points to 2.33 percent.

S&P placed 15 euro-area nations on review for possible downgrades on Dec. 5 citing increased “systemic stress” in the euro region. Greece’s creditor banks broke off talks on a debt swap plan, increasing the risk of the euro-area’s first sovereign default, the Washington-based Institute of International Finance said in a statement today.

Dutch Bonds

The Dutch 10-year yield dropped six basis points to 2.09 percent after reaching a record low 2.073 percent as Agence France-Presse said S&P won’t change its rating of the Netherlands and Luxembourg.

Italian and Spanish bonds pared declines as the European Central Bank was said to buy the nations’ debt by three people with knowledge of the transactions who declined to be identified because the trades are confidential. A spokesman for the ECB in Frankfurt declined to comment.

Spanish 10-year yields climbed nine basis points to 5.22 percent after rising as much as 13 basis points. Italy’s 10-year yields rose were little changed at 6.64 percent after increasing as high as 6.82 percent.

‘Some Disappointment’

Italian debt rose in earlier trade before the nation sold 4.75 billion euros of notes due in 2014 and 2018. It erased its gains after demand weakened at the auction.

“There was a small bid-to-cover, but it was decent, and the fact that it was only decent provided some disappointment,” said Alessandro Mercuri, an interest-rate strategist at Lloyds Bank Corporate Markets in London.

French 10-year rates climbed four basis points to 3.08 percent. The yield on 10-year Belgian bonds jumped 10 basis points to 4.16 percent even after the nation’s debt agency said it hadn’t been contacted by S&P.

Under European Union rules dating from 2009, credit-ratings companies are obliged to give at least 12 hours notice to governments before downgrading their sovereign debt.

Belgium sold 400 million euros of bonds maturing in 2028 and 2035 today, less than the 500 million-euro maximum sought, as borrowing costs declined in its first sale of longer-maturity debt this year.

Volatility on Austria sovereign debt was the highest in euro-area markets today, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Austria will probably lose its AAA rating at S&P on concern about bad debts at the country’s banks, according to a person familiar with the matter. The nation’s 10-year bond yield rose eight basis points to 3.07 percent.

German government bonds are little changed this year, after gaining 9.7 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

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