German bunds rallied, driving five-and 10-year yields to record lows, as a backlash against austerity toppled the Dutch government and left French President Nicolas Sarkozy trailing in his re-election bid.
The Netherlands’ 10-year bond yields reached a three-year high relative to German debt on bets the coalition’s collapse will derail budget-cutting plans and threaten Europe’s response to the debt crisis. French bonds underperformed their German counterparts after the first round of presidential elections. Bunds outperformed all but one of their euro-area peers as a report showed services and manufacturing output in the region contracted more than economists estimated this month.
“The fall of the Dutch government and the outcome of the French elections have had a risk-off effect on the market,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “Bunds should do well, these factors are positive for bunds and negative for French and Dutch bonds.”
German 10-year bond yields declined seven basis points, or 0.07 percentage point, to 1.64 percent at 4:22 p.m. London time. The rate touched an all-time low of 1.633 percent. The 1.75 percent security due July 2022 advanced 0.61, or 6.10 euros per 1,000-euro ($1,313) face amount, to 100.99. The five-year note yield fell to a record 0.601 percent.
Dutch 10-year bond yields surged 11 basis points to 2.43 percent, increasing the spread over bunds by 17 basis points to 78 basis points, the most since March 2009, according to data compiled by Bloomberg.
Dutch Prime Minister Mark Rutte offered his cabinet’s resignation today after losing the support of Geert Wilders’s Freedom Party amid a disagreement on austerity plans. Queen Beatrix will consider the resignation, the government’s information service said in an e-mailed statement.
Leaders of Greece, Finland, Ireland, Italy, Portugal and Spain have either lost elections or resigned since the debt crisis erupted in October 2009, prompting governments to embark on measures to control their obligations or support their peers. Greece is due to hold elections on May 6, almost two years to the day after the country became the first in the euro area to call for aid.
France’s 10-year bond yield spread to bunds widened seven basis points to 145 basis points. It reached 149 basis points on April 20, the most since Jan. 9.
Socialist Francois Hollande took 28.6 percent of the vote in France’s first-round elections yesterday against 27.1 percent for President Nicolas Sarkozy. The anti-euro National Front got 18.1 percent. Hollande would beat Sarkozy by 56 percent to 44 percent in the final round, also due May 6, according to separate surveys conducted by the CSA polling company and Harris Interactive after the results.
French Bond Volatility
“These uncertainties, which may continue beyond elections could sustain volatility in French bonds, which underperformed against peers in the run up,” Wilson Chin and Subhrajit Banerjee, London-based strategists at HSBC Holdings Plc, wrote in a client note today. “Investors are likely to remain cautious in the near term.”
The debt of the euro region last year rose to the highest since the start of the single currency, jumping to 87.2 percent of gross domestic product from 85.3 percent the previous year, official European Union figures showed today. Greece topped the list with debt at 165.3 percent of GDP, while Estonia had the least at 6 percent of GDP.
German bund futures touched a record-high 141.37 after London-based Markit Economics said in an initial estimate today that a euro-area composite index based on a survey of purchasing managers in services and manufacturing industries fell to 47.4, a five-month low, from 49.1 in March. Economists had forecast an increase to 49.3, according to the median of 17 estimates in a Bloomberg News survey. A reading below 50 indicates contraction. Germany’s manufacturing shrank more economists predicted this month, a separate report showed.
“The PMI negative numbers helped the German bund market to rally,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich. “If we have no growth in Germany then that’s bad for the whole euro region,” spurring demand for safer assets, he said.
Volatility in Dutch government securities was the highest among the euro-region nations followed by Germany, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps compiled by Bloomberg. U.S. debt was the most volatile of 24 developed-nation markets, the gauges showed.
The Netherlands also led an increase in the cost of insuring against default on European sovereign debt. Credit-default swaps on Dutch bonds jumped 11.5 basis points to 130, the highest in five months, according to data compiled by Bloomberg.
The Spanish 10-year yield was five basis points higher at 6.02 percent, while Italian bonds with a similar maturity yielded 5.74 percent, an increase of eight basis points.
Spain’s economy contracted 0.4 percent in the first quarter, the Bank of Spain estimated. The government, which is struggling to convince investors it can narrow the deficit by 3 percentage points of its gross domestic product this year, forecasts a contraction of 1.7 percent for 2012.