German Bunds Gain on Signs of Slowing Growth; Spanish Notes Drop

German government bonds rose along with U.S. Treasuries as a collapse in China’s export growth added to signs the global economy is weakening and underpinned demand for the safest assets.

Germany’s two-year yield fell to within three basis points of a record low as a report showed French industrial output stagnated in June. German 10-year bonds completed a weekly gain after inflation unexpectedly cooled in July and the nation’s economy ministry said the outlook for quicker growth was fading. Spanish and Italian two-year notes declined for a fourth day.

“There’s a great deal of uncertainty for all the euro member nations,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Weak Chinese data is a concern because exports are an important aspect of Germany’s economic performance. We’re seeing a little more support for bunds.”

The German 10-year yield fell six basis points, or 0.06 percentage point, to 1.38 percent at 4:23 p.m. London time. The 1.75 percent bond due in July 2022 rose 0.52, or 5.20 euros per 1,000-euro ($1,225) face amount, to 103.405. The yield has declined five basis points this week.

The two-year rate dropped two basis points to minus 0.07 percent after slipping to 0.097 percent on Aug. 2, the lowest level since Bloomberg began tracking the securities in 1990.

The prospect of a worldwide recovery is “fragile,” Germany’s economy ministry said in its report for August published today. “Hopes that the global economy would revive quickly after moderate growth in the winter months are proving premature amid a renewed worsening of the bank and debt crisis,” the Berlin-based ministry said.

Inflation Rate

Germany’s annual inflation rate, calculated using a harmonized European Union method, slowed to 1.9 percent from 2 percent in June, the Federal Statistics Office said. That’s the first time it has fallen below the European Central Bank’s 2 percent limit since December 2010. Slower inflation helps to preserve the purchasing power of the fixed income from debt.

French industrial output was unchanged from May, Insee, the Paris-based statistics office, said in an e-mailed statement. Economists had forecast an increase of 0.1 percent, according to a Bloomberg News survey.

Volatility on German bonds was the highest in euro-area markets today, followed by Finland and the Netherlands, according to measures of 10-year debt, the spread between two-year and 10-year securities and credit-default swaps.

The yield on the 10-year Treasury note declined three basis points to 1.65 percent.

China Exports

China’s annual export growth slowed to 1 percent in July from 11.3 percent the previous month, the customs bureau said in Beijing. Economists surveyed by Bloomberg News predicted an 8 percent gain.

Spanish two-year yields climbed to the highest level in a week amid speculation an ECB plan to buy the debt of so-called peripheral nations won’t be enough to stem the region’s financial crisis.

Spanish and Italian securities jumped last week after ECB President Mario Draghi said the central bank may buy government debt along with the region’s bailout funds. The ECB said yesterday it may take such measures only if troubled nations commit to improving their economies and fiscal positions.

The Spanish two-year yield increased 15 basis points to 4.19 percent, the highest level since Aug. 3. Similar-maturity Italian yields climbed 12 basis points to 3.4 percent.

‘Good Amount’

Norway’s $620 billion sovereign wealth fund, Europe’s biggest, boosted its holdings in German bonds by 53 percent last quarter to 58 billion kroner ($9.78 billion), according to Yngve Slyngstad, chief executive officer of Norges Bank Investment Management, which runs the fund.

“The bund is the most liquid and easily tradable cash instrument in the euro-area bond sphere today, so it’s natural for us to a have a good amount of that,” Slyngstad said in an interview in Oslo.

German bonds returned 3.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 4.3 percent and Italy’s debt earned 9.8 percent.

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