Bunds Halt Three-Day Gain as Germany Agrees to Work With France

German 10-year bonds halted a three-day advance after Finance Minister Wolfgang Schaeuble said Germany and France will work together to help fix the crisis in the euro zone, damping demand for the safest assets.

Two-year German yields climbed toward the highest level in seven weeks after the country sold 1.975 billion euros ($2.48 billion) of 12-month bills. Spanish 10-year bonds rose amid speculation European leaders are making progress on containing the debt crisis. European Central Bank President Mario Draghi may provide hints on future policy when he speaks at the Federal Reserve’s annual symposium in Jackson Hole, Wyoming, on Sept. 1.

“We are now awaiting some key decisions and the market will be in a wait-and-see mode,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “From a fundamental perspective they do look expensive but the safety of bunds remains appealing.”

The German 10-year yield was little changed at 1.36 percent at 4:28 p.m. London time after dropping to 1.32 percent on Aug. 24, the lowest level since Aug. 3. The 1.75 percent bond due in July 2022 traded at 103.61.

Germany’s two-year yield climbed one basis point, or 0.01 percentage point, to minus 0.002 percent, after rising to 0.02 on Aug. 22, the highest level since July 5. Yields below zero mean investors who hold the debt to maturity will receive less than they paid to buy them.

‘Joint Decisions’

Germany’s Schaeuble, speaking after talks in Berlin with his French counterpart, Pierre Moscovici, said the two countries will seek to advance cooperation on banking union, fiscal union and the strengthening of monetary union in Europe.

“We’re having to deal with a phase of weakening growth in the global economy but also in Europe,” Schaeuble said to reporters. “We want to take joint decisions” to counter that.

French President Francois Hollande will travel to Madrid on Aug. 30 for talks with Spanish Minister Mariano Rajoy, Hollande’s office said today. Rajoy has said he will host Merkel in the Spanish capital on Sept. 6.

German two-year note yields stayed below zero as the country sold securities due in 12 months.

Germany auctioned 1.975 billion euros of one-year bills at an average yield of minus 0.0246 percent, the Bundesbank said. That compares with minus 0.054 percent at a sale of similar-maturity debt on July 23. The nation received bids for 3.86 billion euros of the securities, versus a maximum sales target of 3 billion euros, the Bundesbank said.

French Sale

French two-year yields were little changed at 0.19 percent as the country auctioned 7 billion euros of bills maturing between 84 and 357 days. The 84-day securities were sold at a yield of minus 0.013 percent.

Spanish 10-year bonds rose for the first in four days, with the yield falling four basis points to 6.38 percent.

The extra yield, or spread, that investors demand to hold the securities instead of German bunds shrank four basis points to 503 basis points.

Draghi said this month the ECB may intervene in the secondary market to lower borrowing costs in countries that ask for Europe’s bailout fund to purchase their securities.

German bonds are likely to decline if the ECB comes up with a program that is convincing to investors, who may switch to higher-yielding assets and push the 10-year yield to 1.75 percent by year-end, Nordea’s From said.

“There’s a huge amount of event risk in September and against that backdrop, investors are still happy to keep some money in core markets” even with negative yields, said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “There’s so much uncertainty, and many hurdles for markets to overcome.”

Most Volatile

Volatility in Portuguese government debt was the highest in the euro area today, followed by Ireland, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit default swaps.

The yield on Portugal’s 4.375 percent security maturing in June 2014 increased 19 basis points to 4.89 percent. The rate on Ireland’s 4 percent note due in January 2014 fell four basis points to 2.50 percent.

Finland is preparing to sell a 10-year bond denominated in euros according to a person familiar with the offering who asked not to be named because the terms weren’t set.

German bonds returned 3.8 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities fell 2.5 percent, and Italy’s gained 11 percent.

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