German Bunds Rise on Spanish Concern; Italian Securities Weaken

German bunds advanced, with 10-year yields approaching a four-week low, after Murcia became the third Spanish region to say it will need emergency loans, boosting demand for the euro-area’s safest assets.

Italian 10-year bonds weakened even after borrowing costs dropped at an auction. Spanish securities slid as Valencia also signaled it needs funds, a day after Catalonia said it required 5 billion euros ($6.3 billion). European Central Bank policy makers meet in Frankfurt on Sept. 6, when president Mario Draghi may announce details of the bank’s latest efforts to lower the borrowing costs of countries such as Spain and Italy.

“As the situation in the periphery becomes more volatile into the ECB meeting, there is still margin for bunds to rally from here,” said Gianluca Ziglio, a fixed-income strategist at UBS AG in London. “I would expect yields to fall back to the 1.25 percent to 1.20 percent level into September.”

Germany’s 10-year yields fell six basis points, or 0.06 percentage point, to 1.32 percent at 4:36 p.m. London time. They dropped to as low as 1.30 percent yesterday, the least since Aug. 3, and have increased four basis points this month. The 1.75 percent bond due in July 2022 climbed 0.59, or 5.90 euros per 1,000-euro face amount, to 103.01.

German bunds also rose as a report showed economic confidence in the euro area fell to a three-year low in August.

An index of executive and consumer sentiment in the 17-nation euro area dropped to 86.1 from 87.9 in July, the European Commission in Brussels said today. That’s the lowest since August 2009. Economists had forecast a decrease to 87.5, the median of 26 estimates in a Bloomberg News survey showed.

Italian Auction

Italy sold 7.29 billion euros of five- and 10-year securities, compared with a 7.5 billion-euro maximum target. The yield on the new 10-year bond was 5.82 percent, compared to a rate of 5.96 percent at a similar auction on July 30.

“It’s obviously a very good auction,” said Charles Berry, a bond trader at Landesbank Barden Wuerttemberg in Stuttgart. “It’s encouraging to see that Italy can refinance itself at a lower cost than in the previous sale. There’s some optimism in the market that perhaps things won’t get worse than it is now.”

Italy’s 10-year bond yield added two basis points to 5.79 percent after earlier rising as much as seven basis points to 5.84 percent. The five-year rate was six basis points higher at 4.81 percent, after climbing as much as 14 basis points before the auction.

Spanish Bonds

Spanish Prime Minister Mariano Rajoy met French President Francois Hollande in Madrid today as he considers seeking a second European bailout after securing as much as 100 billion euros in loans for banks.

Spain will decide on accepting a bailout when it is known exactly what is on offer, Rajoy said at a press conference.

A day after Catalonia said it needed 5 billion euros from an 18 billion-euro bailout fund announced by Rajoy last month, an official in the southeastern province of Murcia yesterday put its needs at 700 million euros. In Valencia, an official who asked not to be named in line with policy confirmed remarks by economy chief Maximo Buch to Europa Press that 3.5 billion euros would cover only current needs.

Spain’s 10-year bond yield climbed 13 basis points to 6.59 percent, while the two-year rate was 10 basis points higher at 3.71 percent.

Moody’s Investors Service is monitoring developments in Spain “very closely,” Dietmar Hornung, a Frankfurt-based credit analyst, said today in a telephone interview.

Possible Downgrade

“Risks in the euro area are reflected in the ratings we have on euro-area countries themselves,” Hornung said. “Spain is Baa3 and on review for a possible downgrade and we are monitoring developments there very closely.”

Slovak Prime Minister Robert Fico said he sees a 50 percent chance the 17-nation euro region will break up because of the sovereign-debt crisis.

The fate of the bloc will depend on whether it is able to handle situations in troubled countries such as Greece and Spain and also on whether members are able to accept deeper integration, Fico said at a press conference in Slovak capital Bratislava.

Baring Asset Management may start buying Spanish and Italian bonds if 10-year yields return to 7 percent, Alan Wilde, the London-based head of fixed income and currencies, said in an interview. Yields at that level will probably trigger action from the ECB, Wilde said.

German government bonds returned 3.6 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italy’s rose 11 percent and Spain’s fell 2.4 percent.

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

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