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German Bunds Rise on ECB Rates Bets as Spanish Debt Gains

German bonds advanced and implied yields on interest-rate futures fell to records on speculation that the European Central Bank will signal this week it may cut borrowing costs.

Spain’s 10-year bonds rose for the first time in three days as a report showed the nation’s economy shrank less than previously forecast in the first quarter. Italian debt gained after German Chancellor Angela Merkel said European Union leaders will discuss plans to bolster economic growth at their June summit. ECB President Mario Draghi, who chairs a policy meeting this week, called for a “growth compact” on April 25 as the sovereign debt crisis weighed on the euro-area economy.

“People have noticed that the ECB appeared to have shifted its tone a bit recently about inflation and growth,” said Steven Barrow, an analyst at Standard Bank Plc in London. “Some of the data are starting to look nasty again, and perhaps the bond market is speculating the ECB may use the meeting this week to signal that there’s room for easier monetary policy.”

German 10-year bond yields fell four basis points, or 0.04 percentage point, to 1.66 percent at 3:59 p.m. London time, after reaching a record-low 1.63 percent on April 23. The price of the 1.75 percent bond due July 2022 rose 0.37, or 3.70 euros per 1,000-euro ($1,324) face amount, to 100.84. Five-year yields slid four basis points to 0.60 percent. The rate reached an all-time low of 0.595 percent on April 27.

The Stoxx Europe 600 Index of shares fell 0.7 percent and the euro slipped 0.1 percent to $1.3236.

Lower Borrowing Costs

Euribor futures rose, a sign investors were adding to bets for lower borrowing costs. The yield on the contract expiring in December declined five basis points to 0.56 percent. A close at that rate would be a record.

“The recent sharp rally in the front end of Euribor appears to be on the back of the market interpreting recent Draghi comments as opening the door for monetary easing,” said Mohit Kumar, head of European interest-rate strategy at Deutsche Bank AG in London. “This is overdone.”

The EU may consider strengthening the European Investment Bank as part of a plan to encourage growth, Merkel was cited as saying in an interview with the Leipziger Volkszeitung newspaper published on April 28.

Growth ‘Rhetoric’

Spain’s gross domestic product slid 0.3 percent in the first quarter, the same as in the previous three months, the Madrid-based National Statistics Institute said today. That compares with the Bank of Spain’s estimate on April 23 of a 0.4 percent decline.

“Spanish bond yields will stabilize from here, and the recent sell-off was just a consolidation of a rapid move,” Kumar said. “Politicians seem to have shifted their rhetoric to growth from austerity. That may help peripheral bonds.”

Spanish 10-year bond yields fell nine basis points to 5.79 percent, paring this month’s increase to 44 basis points. Italy’s two-year note yield dropped 12 basis points to 3.13 percent and the rate on 10-year bonds slipped nine basis points to 5.55 percent.

Volatility in German government bonds was the highest in euro-area markets, according to measures of 10-year bonds, two-and 10-year yield spreads and credit-default swaps compiled by Bloomberg. Norwegian debt was the most volatile of 24 developed-nation markets tracked by the gauges.

Bunds Advance

The inflation rate in the 17-nation euro area slowed to 2.6 percent from 2.7 percent in March, the European Union’s statistics office in Luxembourg said today, helping to preserve the value of fixed payments on bonds.

German debt returned 0.9 percent in April, beating all their AAA rated peers in the region, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities are the worst performers this month, handing investors a 2.3 percent loss.

Italian bonds have returned 8.8 percent this year, according to the indexes, as the ECB provided more than 1 trillion euros of three-year loans to the region’s banks, some of which was used to buy government debt.

Central bank policy makers will announce their decision on interest rates on May 3, with all 58 analysts surveyed by Bloomberg News forecasting that the benchmark rate will remain at 1 percent.

Greek Bonds

Greek 10-year bonds rose a third day after Evangelos Venizelos, the nation’s former finance minister, said the socialist Pasok party he now leads plans to end Greece’s reliance on international assistance by the end of 2015.

“Our aim is to shape a clear and stable framework that will gradually reduce Greece’s dependence on financial aid,” Venizelos said in a speech in Athens on April 28, shown live on state-run NET TV. “Our aim is for Greece to be a fiscally self-sustaining and equal member of Europe” and “to gradually exit the loan agreement, with dependency ending in three years.”

The last opinion polls on the May 6 elections, released before a two-week ban on their publication, showed no one party would win enough votes to govern on its own.

The yield on Greek bonds maturing in February 2023 fell 19 basis points to 20.36 percent and touched 20.18 percent, the lowest since March 29.

The European bond market will be closed tomorrow for a public holiday, re-opening on May 2.

-- With assistance from Tj Marta in New York and Fabio Benedetti-Valentini in Paris. Editors: Paul Dobson, Nicholas Reynolds

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