German government bonds gained, with 10-year yields falling the most in seven weeks, as concern euro-area growth has stalled and the sovereign debt crisis is worsening fuelled demand for safer assets.
Benchmark yields dropped to a three-week low after purchasing managers’ indexes showed the region’s service sector shrank in August and German manufacturing contracted for a sixth month. Spanish and Italian bonds pared earlier gains as the European Central Bank was said to wait until a court ruling before unveiling details of a plan to buy the securities of the most-indebted nations. Bunds also rose as Federal Reserve minutes showed policy makers were ready to increase stimulus.
“In Germany, services PMI was below 50, which was a concern because it signifies some weakening,” said Mohit Kumar, head of European fixed-income strategy at Deutsche Bank AG in London. “What really started the rally in bunds were the dovish Fed minutes.”
The German 10-year yield dropped 14 basis points, or 0.14 percentage point, this week to 1.36 percent at 5 p.m. in London yesterday, the biggest decline since the period ended July 6. It fell to 1.32 percent, the lowest level since Aug. 3. The 1.75 percent bond due in July 2022 rose 1.305, or 13.05 euros per 1,000 euro ($1,255) face amount, to 103.615.
Spain’s 10-year yield was little changed this week at 6.42 percent after dropping to 6.15 percent on Aug. 22, the lowest since June 11. Similar-maturity Italian rates ended the week seven basis points lower at 5.71 percent. They earlier fell as much as 22 basis points.
A gauge of euro-area services declined to 47.5 this month from 47.9 in July, London-based Markit Economics said Aug. 23. A German manufacturing index was at 45.1 in August, Markit said, below the level of 50 that signals contraction. German economic growth slowed to 0.3 percent in the second quarter, from 0.5 percent in the previous three months, the Federal Statistics Office said the same day.
With Germany’s Constitutional Court set to rule on the legality of Europe’s permanent bailout fund on Sept. 12, investors looking for ECB President Mario Draghi to announce a definitive purchase program at his Sept. 6 press conference might be disappointed, according to two central-bank officials, who spoke on condition of anonymity because the deliberations are not public.
Many Fed “members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” according to the minutes of the central bank’s July 31-Aug. 1 meeting released on Aug. 22 in Washington.
Italy will sell zero-coupon bonds on Aug. 28, and Spain is scheduled to auction bills on the same day.
Germany’s bonds returned 3.7 percent this year through Aug. 23, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds lost 2.3 percent, and Italy’s gained 11 percent.