Germany’s bonds fell, with 10-year yields rising to the highest in more than two months, as a constitutional court cleared Europe’s permanent bailout fund for ratification, damping demand for the safest assets.
Spanish and Italian government securities advanced amid speculation the 500 billion-euro ($645 billion) European Stability Mechanism will help stem the spread of the region’s debt crisis. Irish and Portuguese bonds also gained before euro-area finance ministers meet this week in Cyprus. Germany must make sure its share of the ESM is capped at 190 billion euros, the court said in its ruling today.
The decision is “one nagging issue that’s out of the way and means the focus is now going to be on the Eurogroup meeting,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris. The cap on liability “will not prevent the ESM from going ahead, which is critical,” he said.
Germany’s 10-year yield climbed eight basis points, or 0.08 percentage point, to 1.62 percent at 4:27 p.m. London time after rising to 1.65 percent, the highest since June 29. The 1.5 percent bond due September 2022 dropped 0.72, or 7.20 euros per 1,000-euro face amount, to 98.885.
The yield increased above its 200-day moving average, currently at 1.64 percent, for the first time since July 2011.
Germany’s Federal Constitutional Court in Karlsruhe dismissed motions that sought to block the ESM and a deficit-control treaty championed by Chancellor Angela Merkel. The ESM’s governing board will hold its first meeting on Oct. 8, Luxembourg Prime Minister Jean-Claude Juncker said in a statement after the verdict.
The euro strengthened 0.4 percent to $1.2904 after rising above $1.29 for the first time since May.
German five-year notes fell for a third day as the nation received bids for 5.47 billion euros of new securities due in October 2017 at an auction today, compared with a maximum sales target of 5 billion euros.
The yield on the previous benchmark five-year notes due in April 2017 rose seven basis points to 0.54 percent.
Germany received the fewest bids relative to its maximum sales target since demand dropped below its goal at an auction on Sept. 28. The country also sold 578 million euros of 10-year index-linked bonds at an average yield of minus 0.27 percent.
Spain’s 10-year yield fell seven basis points to 5.62 percent. The extra yield investors demand to hold the securities instead of similar-maturity bunds shrank 15 basis points to 400 basis points after contracting to 395 basis points, the narrowest since April 5.
Italy’s 10-year bond yield dropped five basis points to 5.03 percent. They earlier declined to 5.01 percent, the least since April 2.
The nation sold 9 billion euros of one-year bills at a rate of 1.692 percent, the lowest level since March. Italy also auctioned 3 billion euros of three-month securities.
Dutch bonds declined as the Netherlands holds elections today that may result in a coalition between parties that have clashed on domestic and European policies. The campaign’s final poll showed Diederik Samsom’s opposition Labor Party was almost neck-and-neck with Prime Minister Mark Rutte’s Liberal Party.
The Dutch 10-year bond yield increased two basis points to 1.88 percent.
Ireland’s nine-year bond yield dropped 19 basis points to 5.41 percent after reaching 5.40 percent, the lowest level since August 2010.
The yield on Portuguese debt due in October 2023 declined 20 basis points to 8.09 percent after sliding to 8.05 percent, the least since March 2011. The rate on the Greek bond maturing in February 2023 fell 92 basis points to 20.7 percent.
Euro-area finance ministers will weigh the “bleak” state of the economy, examine the situation in selected countries and take stock of progress in setting up the European Stability Mechanism when they meet on Sept. 14 in Cyprus, a European Union official said this week.
Volatility on Irish bonds was the highest in euro-area markets today, followed by Germany and France, according to measures of 10-year or similar-dated debt, the spread between two-year and 10-year securities and credit-default swaps.
Bunds have proven better than Treasuries since the start of the global financial crisis five years ago as U.S. stimulus measures and record deficits keep investors wary of a resurgence of inflation.
The BLOOMBERG RISKLESS RETURN RANKING shows bunds are the best-performing sovereign securities among Group of Seven nations since June 2007, returning 8.4 percent after adjusting for volatility and comparing returns in local currencies. Treasuries have gained 7.4 percent, also lagging behind Canadian, French and U.K. debt on a risk-adjusted basis.
German debt returned 2.6 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds advanced 1.5 percent and Italy’s gained 15 percent.
-- With assistance from Cordell Eddings in New York. Editors: Nicholas Reynolds, Mark McCord