German Bonds Drop as Safety Bid Fades, Ireland Returns to Market

Germany’s 30-year bonds fell, pushing yields toward a two-month high, as optimism central banks will act to boost the global economy reduced the allure of holding the securities of Europe’s largest economy as a haven.

Spanish and Italian bonds advanced amid speculation the European Central Bank may announce support measures similar to two longer-term refinancing operations, or LTROs, it undertook in December and February. Irish bonds rose a fifth day as the country announced plans to re-enter credit markets. Longer-maturity German securities also dropped after the Netherlands amended interest rates used by insurers to determine their solvency positions, damping demand for the bonds.

“The market is perhaps starting to take into account the ECB meeting this week,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “We expect a rate cut at this meeting and don’t rule out further LTROs in the future.” A reduction in rates “should benefit peripheral bonds in a very near term,” he said.

The yield on Germany’s 30-year bond rose seven basis points, or 0.07 percentage point, to 2.37 percent at 4:30 p.m. London time, after sliding three basis points yesterday. The 2.5 percent security due July 2044 dropped 1.545, or 15.45 euros per 1,000-euro ($1,256) face amount, to 102.88.

‘Stabilizing Measures’

ECB officials will lower their benchmark rate by 25 basis points to a record-low 0.75 percent, according to the median forecast in a Bloomberg survey of 62 economists. Five predict a cut of 50 basis points and 11 foresee no change.

“The market appears to be in a risk-on mode today, and that’s perhaps why bunds struggled to rise,” said Charles Berry, a bond trader at Landesbank Baden-Wuerttemberg in Stuttgart. “Italian and Spanish bonds are rising ahead of the ECB as some people are covering short positions. They don’t want to be caught on the wrong side of the market in the case that the ECB announces further market stabilizing measures.” A short position is a bet the price of an asset will drop.

Ten-year German yields rose two basis points to 1.54 percent, while their Spanish peers slipped 12 basis points to 6.26 percent. That left the extra yield that investors get for holding the Spanish debt instead of bunds at 472 basis points, down from 537 basis points a week ago. Italy’s 10-year bond yield fell 10 basis points to 5.64 percent.

Dutch Insurers

Dutch 10-year bonds fell two basis points as the Netherlands sold 6 billion euros of debt due in January 2018, a day after the country sold bills at a negative yield. The yield on the 10-year securities was at 2 percent.

Thirty-year bonds in AAA nations including Germany, the Netherlands and Finland slid after the Dutch central bank announced a rule that allows insurers to use a new interest rate for their long-dated debt to reduce fluctuations in insurance companies’ solvency positions.

“The rules could result in lower demand for long-dated bonds,” said Wilson Chin, a senior interest-rate strategist in London at HSBC Holdings Plc. “But these have been expected by the market for a while and therefore the immediate impact would be limited.”

The yield on Dutch securities maturing in January 2042 increased eight basis points to 2.66 percent. The rate jumped to 2.73 percent on June 29, the most since April. Finland’s 30-year yield increased seven basis points to 2.72 percent.

Irish Volatility

Volatility on Irish government debt was the highest in developed markets today, followed by Italy and Belgium, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit default swaps.

Ireland is planning to sell 500 million euros of treasury bills maturing on Oct. 15 in two days, the Dublin-based National Treasury Management Agency said. The yield on the nation’s securities due October 2020 fell 12 basis points to 6.22 percent, the least since 2010.

Denmark, which isn’t part of the euro area, sold two-year notes at a negative yield today, the Copenhagen-based central bank said in a statement.

French bonds stayed higher after Prime Minister Jean-Marc Ayrault announced measures that will steer it to a balanced budget in 2017, including job creation and a 75 percent income tax on annual earnings of more than 1 million euros.

The yield on 10-year bonds fell four basis points to 2.55 percent, while two-year note yields dropped six basis points to 0.41 percent.

German bonds have returned 2.3 percent this year, while Spanish securities handed investors a loss of 3.6 percent amid an escalation in the sovereign-debt crisis, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian debt earned 9.3 percent.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE