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Bunds Gain as Euro-Area Industry Contracts; Spanish Bonds Slide

German bunds rose the most in a month after industry data showed euro-region manufacturing and services shrank more than economists forecast, spurring demand for safer assets.

The securities advanced for a third day, the longest wining run in seven weeks, after a Chinese purchasing managers’ index also signaled manufacturing contracted in March. Spanish bonds fell for a ninth day as signs that regional growth is slowing sapped investor appetite for higher-yielding assets. Germany boosted its target for debt sales next quarter by 3 percent to provide funding for the euro-area’s bailout fund, the Federal Finance Agency said.

“Bunds rallied as the PMI data disappointed,” said Achilleas Georgolopoulos, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “There were expectations that the data would be better. The data refocused the attention to economic growth, which is a problem for 2012.”

The yield on the 10-year bund fell seven basis points, or 0.07 percentage point, to 1.91 percent at 4:01 p.m. London time after dropping eight basis points, the most since Feb. 22. The 2 percent bond due January 2022 rose 0.65, or 6.50 euros per 1,000-euro ($1,320) face amount, to 100.825. The last time bunds gained for three days was the period ended Jan. 31.

A euro-area composite index based on a survey of purchasing managers in services and manufacturing fell to 48.7 in March from 49.3 in February, London-based Markit Economics said. A reading below 50 indicates contraction. A preliminary index of China manufacturing from HSBC Holdings Plc and Markit Economics dropped to 48.1 from 49.6 in the previous month.

Spanish Bonds

Spanish 10-year yields climbed 10 basis points to 5.51 percent after reaching 5.53 percent, the highest since Feb. 16. Italian 10-year yields rose 11 basis points to 5.11 percent. They earlier reached 5.12 percent, the most since March 7.

Europe’s debt crisis “is certainly not over,” Andrew Bosomworth, Pacific Investment Management Co.’s Munich-based head of portfolio management said today at a Bloomberg Sovereign Debt Conference in Frankfurt. “The status quo is not working and it has got to be fixed.”

Bosomworth said he won’t buy Italian or Spanish bonds until their governments are in surplus.

The extra yield investors demand to hold 10-year Spanish bonds instead of similar-maturity bunds widened as much as 19 basis points to 3.61 percentage points, the most since Feb. 16.

ECB Funds

The European Central Bank has provided more than 1 trillion euros in three-year loans to the region’s banks since December, helping boost the bonds in nations such as Italy and Spain. Italian 10-year yields dropped from a euro-era record 7.48 percent in November to as low as 4.68 percent this month. Benchmark Spanish yields fell from 6.78 percent to as little as 4.83 percent.

Germany will issue 68 billion euros of bonds and bills, up from a 66 billion-euro forecast in December, the Frankfurt-based agency said in an e-mailed statement. The country has agreed to pay 21.5 billion euros of the 80 billion euros required for the “paid-in” cash reserve of the 500 billion-euro European Stability Mechanism.

German bunds have returned 11 percent over the past year as the debt crisis increased demand for havens, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portuguese debt dropped 16 percent Spanish securities gained 4.8, the data show.

‘No Value’

European and U.S. government bonds currently offer “no value,” Daniel Fuss, vice chairman of Loomis Sayles & Co., said at the conference in Frankfurt hosted by Bloomberg Link.

The debt crisis in Europe and the U.S. is being caused by structural deficits exacerbated by aging populations and will be a long-term issue, he said. “There is reasonable value in some corporate bonds,” Fuss said.

Italian 10-year bond futures may fall to a two-week low should they stay below a key level of so-called resistance, UBS AG said, citing trading patterns.

The contracts “are vulnerable while they trade below the 107 March 19 high,” Richard Adcock, head of fixed-income technical strategy at UBS in London, wrote in a research note. “A break below yesterday’s 105.25 will develop these themes further, opening the door back to the 103.69 retracement level,” he said.

The 10-year contract expiring in June dropped 0.6 percent to 104.65. Resistance refers to an area on a graph where technical analysts anticipate sell orders to be clustered.

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