Bunds Extend Worst Week for 4 Months on U.S. Data as Crisis Ebbs

Klaus Regling
Klaus Regling, chief executive officer of the EFSF, speaks during a press conference at the European Council headquarters in Brussels, on Nov. 7, 2011. Photographer: Jock Fistick/Bloomberg

German bunds fell, extending their biggest weekly drop since November, amid a global selloff in government bonds spurred by bets U.S. economic growth is gathering pace and the European debt crisis is abating.

Two-year note yields climbed to a three-month high after the head of Europe’s bailout fund Klaus Regling said efforts to contain the region’s sovereign woes are working and he’s planning three debt sales next week. Irish debt fell as the nation’s Finance Minister said he expects to cut growth forecasts for this year.

“The catalyst for the selloff in bunds has been U.S.- led,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “We’re seeing some undermining of the idea of low rates for a long time. The market is beginning to change its mind, and that’s dragging long-term rates higher across the board.”

The German 10-year yield rose nine basis points, or 0.09 percentage point, to 2.05 percent at 4:34 p.m. London time. It earlier reached 2.07 percent, the highest since Dec. 13. The yield has risen 26 basis points this week, the biggest increase since the five-day period ending Nov. 25. The 2 percent bond due January 2022 fell 0.7, or 7 euros per 1,000-euro ($1,318) face amount, to 99.58.

Two-year yields climbed five basis points to 0.33 percent, after reaching 0.36 percent, the most since Dec. 7.

Bund Market Volatility

Volatility in Germany’s 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, followed by Finland.

Ten-year Treasuries fell for an eighth day as a report showed the U.S. cost of living rose in February by the most in 10 months, adding to concern inflation may accelerate as the economy strengthens. The consumer-price index climbed 0.4 percent in February after increasing 0.2 percent the prior month, the Labor Department reported today.

“There’s still a drag on bunds from the U.S., where we’ve seen some positive economic data,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “There’s a lack of bad news in the euro zone, and that’s helped sentiment.”

Bund yields may continue to rise toward 2.35 percent should they break through a key support level, Bank of America Merrill Lynch said, citing technical indicators.

Support Break

“German rates are threatening to break” through 2.05 percent, MacNeil Curry, the bank’s New York-based head of foreign-exchange and interest-rates technical strategy, wrote in a note to clients. A sustained move above 2.05 percent could see bunds rise “towards 2.35 percent in the sessions and weeks ahead,” he wrote.

Support refers to a level on a chart where orders to buy are grouped. The stronger the support, the more selling is needed to breach it.

The yield on Irish bonds maturing in October 2020 rose after Finance Minister Michael Noonan said yesterday he expects to cut the government’s 1.3 percent economic growth forecast for this year when the government revises its figures next month.

Ireland will still meet its full-year budget deficit target of 8.6 percent of gross domestic product, Noonan said in Paris yesterday, according to Paul Bolger, a spokesman for the ministry, who confirmed the comments by the minister.

The yield on Ireland’s 2020 securities advanced one basis point to 6.86 percent.

European Rescue Fund

The European Financial Stability Facility may sell as much as 1.5 billion euros in 20-year to 30-year bonds on March 19 and 3 billion euros or more in benchmark five-year notes on March 22, the chief executive officer of the euro-region’s 440 billion-euro rescue fund said today.

Euro-area finance ministers will decide this month on how to handle the combined capacity of the EFSF and its successor rescue fund, Regling said in comments to news agencies released today. The ministers will meet on March 30 in Copenhagen.

Greece plans to sell 1 billion euros of 91-day bills on March 20, the Public Debt Management Agency in Athens said today. The nation sold three-month bills on Feb. 14 at an average yield of 4.61 percent.

Germany’s 10-year break-even rate gained for a fourth day even after the nation said today it plans to sell 2 billion euros of a new index-linked bond maturing in April 2023 on March 21. The gauge of inflation expectations widened two basis points to 1.74 percentage point.

Year-to-Date Loss

German government bonds made a loss of 0.8 percent this year after returning 9.7 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries fell 1.7 percent since Dec. 31, the indexes show, while Irish debt has returned 10 percent.

The rate on 10-year bunds, Europe’s benchmark government debt securities, climbed as high as 3.51 percent on April 11, 2011. The average in the past 10 years is 3.64 percent.

The average yield on 1,277 government debt securities in Merrill Lynch’s Global Sovereign Broad Market Plus Index climbed to 1.764 percent yesterday from 1.666 percent on March 1. The yield was 2.249 percent a year ago.

“I’d expect to see some support for bunds with yields at current levels,” Credit Agricole’s Chatwell said. Rates “may slip below 2 percent again,” he said. “The caveat would be if we see a violent selloff in Treasuries, and that takes the bund yield higher no matter what support we have.”

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