German Bonds Drop on Bets European Crisis-Fighting Plan Closer

German bonds fell, pushing 10-year yields up from an all-time low, amid speculation European officials are moving closer to new measures to fight the spread of the region’s debt crisis.

Benchmark bunds had their first back-to-back decline in almost a month after Group-of-Eight leaders urged Greece to stay in the euro and supported boosting growth. Italian notes rose as German and French officials meet before a summit of regional leaders on May 23. Irish two-year yields climbed to the highest in four months even as the central bank head said it was a “huge leap” to assume the nation would seek a new bailout.

“At the G-8 meeting the euro zone was one of the key talking points, so it seems as though leaders are acknowledging the scale of the problem and markets are moving on anticipation we may see some sort of proactive action,” said Brian Barry, an analyst at Investec Bank Plc in London. “With bund yields at such low levels, if there are any signs of a proactive change you are likely to see some sharp moves.”

The 10-year bund yield rose two basis points, or 0.02 percentage point, to 1.45 percent at 4:01 p.m. London time after falling to a record 1.396 percent on May 18. The 1.75 percent security due in July 2022 dropped 0.2, or 2 euros per 1,000-euro ($1,276) face amount, to 102.83.

‘Cohesive Euro Zone’

German Chancellor Angela Merkel and French President Francois Hollande are seeking to balance France’s desire to jumpstart growth with Germany’s preference for spending cuts as a way of resolving the debt crisis.

“We agree on the importance of a strong and cohesive euro zone for global stability and recovery, and we affirm our interest in Greece remaining in the euro zone while respecting its commitments,” the G-8 said in a statement on May 19.

Italian bonds advanced on optimism the European leaders meeting this week will make progress on containing the debt crisis. The two-year note yield dropped three basis points to 3.72 percent, and 10-year yields declined three basis points to 5.78 percent.

Irish two-year notes fell for a 12th day even after central bank Governor Patrick Honohan said “Plan A is still a good one,” referring to the nation’s intention to exit its 67.5 billion-euro bailout at the end of 2013.

External factors are pushing up the cost of purchasing the country’s debt in secondary markets, Honohan said, adding that he hopes market conditions will improve “in time.”

Ireland’s two-year note yield climbed 17 basis points to 7.37 percent.

Belgian Auction

Belgian bonds advanced as the country sold 2.55 billion euros of bonds maturing between June 2017 and March 2026.

The debt agency said it sold 1.015 billion euros of bonds due in September 2022 at an average yield of 3.453 percent, down from 3.737 percent at the most recent auction of the securities on Feb. 27.

Belgium’s benchmark 10-year yield dropped five basis points to 3.28 percent after earlier climbing to 3.39 percent, the highest level since April 27.

Germany’s two-, five-, 10- and 30-year yields fell to records last week after Moody’s Investors Service lowered the credit ratings of 16 Spanish banks, citing economic weakness and the government’s mounting budget strain.

Spain revised up its 2011 budget deficit to 8.9 percent of gross domestic product after accounting for the unpaid bills of regional governments, the Budget Ministry said on May 18.

‘Natural Appetite’

“The underlying problems in the euro zone will stay so there will be a natural appetite for core bonds, at least for the next few weeks,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “Markets will be sidelined, and will wait for Wednesday.”

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

German debt has returned 2.9 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds have lost 3.4 percent, and Italian debt gained 8.1 percent.

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