Bunds Slide as Borrowing Costs Fall at French, Spanish Auctions

Jan. 21 (Bloomberg) -- German bunds fell the most since November as the downgrade of nine euro-area nations by Standard & Poor’s failed to damp demand at European debt sales this week, giving investors less reason to buy the region’s safer assets.

German two-year yields climbed to a four-week high and Italian bonds advanced amid speculation European officials are moving closer to agreement on a planned fiscal treaty. Greece’s benchmark 2022 bonds gained for a third week as officials strived to reach an agreement with private creditors on a voluntary debt swap.

“The ratings downgrades aren’t the ‘be all and end all,’” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The market pre-empted them so by the time they happened it was old news. The Greek talks seem to be heading towards an agreement and the auctions this week have been able to reach their required amount, so a combination of factors have helped bund yields rise this week.”

Germany’s 10-year yield rose 16 basis points, or 0.16 percentage point, this week to 1.93 percent, the biggest increase since the five days ended Nov. 25. The 2 percent bond due January 2022 fell 1.495, or 14.95 euros per 1,000-euro ($1,293) face amount, to 100.63.

The two-year yield climbed five basis points to 0.21 percent after reaching 0.24 percent, the most since Dec. 23.

France, Spain

Bunds declined as borrowing costs fell at French and Spanish debt sales. France auctioned 7.97 billion euros of notes, just short of its maximum target, with the average yield on the benchmark two-year notes sliding to 1.05 percent from 1.58 percent in October. Spain sold 6.61 billion euros of bonds maturing in 2016, 2019 and 2022 on Jan. 19, exceeding the maximum target of 4.5 billion euros.

S&P announced after financial markets shut on Jan. 13 that it cut the credit ratings of France and Austria by one level to AA+ and warned they may face further reductions. Italy, Portugal, and Spain were lowered by two steps.

The yield on Greece’s 5.9 percent bond maturing in October 2022 fell 21 basis points in the week even as two-year yields set a record high of 189.88 percent. Finance Minister Evangelos Venizelos said yesterday that the talks on a second financing package with European Commission, European Central Bank and International Monetary Fund representatives were in their “final phase.”

The extra yield investors demand to hold Italian 10-year bonds over German bunds shrank to as narrow as 431 basis points, the least since Dec. 12.

Budget Plan

A draft document showed European Union governments plan to set tougher rules on budget deficits to restore credibility in its attempts to tackle the debt crisis. The blueprint will be discussed by EU finance ministers at a meeting on Jan. 23.

Germany and France are set to auction bills the same day, with further debt sales by Europe’s largest economy, the Netherlands, Spain and Italy in the following days.

Bunds have handed investors a loss of 0.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French bonds lost 0.2 percent, Greek debt is down 1.4 percent and Italian bonds returned 2.7 percent, the indexes show.

-- Editors: Nicholas Reynolds, Paul Dobson

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net