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Bunds Set for 2nd Weekly Gain Before Ministers’ Bailout Talks

German bunds headed for a second weekly gain amid concern euro-area finance ministers meeting in Copenhagen to discuss increasing bailout funds for troubled member states will struggle to contain the region’s debt crisis.

Benchmark German yields were within a basis point of a two-week low as a European report showed consumer-price inflation slowed less than economists estimated in March. Germany’s Finance Minister Wolfgang Schaeuble said governments are poised to agree on a firewall of about 800 billion euros ($1.07 trillion). Spanish bonds rose as the government prepares to present its budget a day after workers walked out over changes to labor rules.

“There’s a lot of uncertainty, which benefits bunds,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “Everybody’s looking at the Spanish budget, which will have some brutal austerity measures, but the big unknown for the market is the implementation risk.”

Germany’s 10-year yield was little changed at 1.80 percent at 10 a.m. London time, having declined six basis points this week. The yield dropped to 1.796 percent yesterday, the lowest since March 13. The 2 percent bond maturing in January 2022 traded at 101.755.

Spanish 10-year bonds advanced, pushing the yield down four basis points to 5.42 percent. The yield on similar-maturity Italian debt slid six basis points to 5.15 percent.

Balancing Act

Austrian Finance Minister Maria Fekter said the euro area may let its temporary and permanent bailout funds operate alongside each other to bolster the fight against the sovereign-debt crisis. Policy makers are trying to strike a balance between meeting international demands for a more powerful war chest and opposition in donor countries led by Germany to providing additional aid for underperforming economies on the region’s fringes.

The market is expecting the fund to range between 700 billion euros and 940 billion euros, Graham-Taylor said.

The inflation rate in the 17-nation euro region fell to 2.6 percent from 2.7 percent in February, the European Union’s statistics office in Luxembourg said in an initial estimate today. While that is the lowest rate since August, it was above the 2.5 percent pace forecast by economists, according to the median of 39 estimates in a Bloomberg News survey.

German retail sales unexpectedly fell for a second month in February, a separate report showed today. Adjusted for inflation and seasonal swings, sales fell 1.1 percent from January, when they slid 1.2 percent, the Federal Statistics Office said in Wiesbaden.

‘Absolutely Convinced’

Bunds have returned 0.2 percent in 2012 according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portuguese bonds returned 14 percent, the most of 26 sovereign markets tracked by the indexes.

Spanish Finance Minister Luis de Guindos said Spain’s budget and reforms will reassure investors and ministers.

“We’re absolutely convinced, with these reforms and budget, that we’re on the right track to return to a recovery and leave our problems behind of the past years,” de Guindos told reporters in Copenhagen today.

Volatility on Finland’s bonds was the highest in euro-area markets followed by the Netherlands, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

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