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French, Belgian Bonds Rise Before German Court’s Aid-Fund Ruling

French and Belgian bonds led gains by Europe’s so-called semi-core government securities before Germany’s Constitutional Court rules tomorrow on the legality of Europe’s bailout fund, underpinning demand for safer assets.

French 10-year yields dropped to the lowest level in a week after Spanish Prime Minister Mariano Rajoy said he was opposed to Europe setting budget cuts for the country as a condition for assistance. Dutch bonds rose as the country sold 2 billion euros ($2.6 billion) of 10-year securities before elections tomorrow. Switzerland sold three-month bills at a negative yield.

“There are a few events on the horizon that have the potential to turn the direction of the market,” said Brian Barry, an analyst at Investec Bank Plc in London. “Investors will remain reasonably comfortable holding safe assets until we get more of an indication of how things are going to play out.”

The French 10-year yield dropped eight basis points, or 0.08 percentage point, to 2.17 percent at 4:48 p.m. London time after falling to 2.16 percent, the lowest level since Sept. 3. The 3 percent bond due in April 2022 rose 0.70, or 7 euros per 1,000-euro face amount, to 107.12.

Belgium’s 10-year yield declined 10 basis points to 2.58 percent, and the Dutch 10-year rate fell three basis points to 1.86 percent.

Debt Ratings

French government debt is rated Aaa at Moody’s Investors Service, the highest level, while Belgium’s bonds are ranked Aa3, the fourth-highest. Spanish bonds are rated Baa3, one step above junk.

Germany’s Federal Constitutional Court said it will proceed with its ruling tomorrow on the nation’s participation in the 500 billion-euro European Stability Mechanism. A bid by German lawmaker Peter Gauweiler to get the hearing delayed after the European Central Bank pledged unlimited funds to buy government debt was rejected today.

The fund will offer loans to euro-member states and may buy their bonds to lower borrowing costs. If Germany can’t ratify the ESM treaty and join, the mechanism won’t be created and other bailout measures might be thrown into doubt.

Spanish two-year note yields rose four basis points to 2.92 percent after touching 3.04 percent. Two-year Dutch notes yielded 0.10 percent.

Rajoy said yesterday he won’t allow the European Union or the ECB to set budget rules as a condition for buying the country’s bonds. He pledged that Spain will meet its deficit-reduction targets for this year and next, and defended the government’s right to set spending limits on individual policies.

Spain Uncertainty

There’s “some uncertainty in the market remaining ahead of key decisions,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. “Spain doesn’t want to go to a complete, full adjustment program.”

German Finance Minister Wolfgang Schaeuble said in Berlin yesterday that progress made by Spain since it implemented reforms means it doesn’t need to apply for a full bailout, according to two party officials who participated in a private briefing.

German bonds returned 2.6 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish government securities advanced 1.3 percent, while Italy’s debt earned 14 percent.

The Netherlands sold July 2022 bonds at an average yield of 1.846 percent today, according to the nation’s debt agency. That’s the lowest level since Bloomberg began collecting the data in 2007.

Dutch Vote

The nation may vote to return a Liberal and Labor Party coalition at tomorrow’s parliamentary elections, pairing parties that have clashed on both domestic and European policies and adding to concern lawmakers across the region will fail to agree on how to resolve the debt crisis. Labor Party leader Diederik Samsom is willing to extend Greece’s financial lifeline while Liberal Prime Minister Mark Rutte won’t back a third aid package.

Volatility on French bonds was the highest in euro-area markets today, followed by Austria and Belgium, according to measures of 10-year or equivalent-maturity debt, the spread between two-year and 10-year securities and credit-default swaps.

Switzerland sold 931 million francs ($992 million) of 91-day bills with an average yield of minus 0.3 percent. That compares with a rate of minus 0.35 percent at a previous auction of similar-maturity securities on Aug. 28.

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