German Bunds Rise 2nd Week on Signs Europe Headed for Recession

German bunds rose for a second week as signs the euro area is headed for a recession boosted demand for safer assets and fueled speculation the European Central Bank will keep interest rates at a record low.

The securities gained for a sixth quarter, the longest run since December 1998, as reports showed economic confidence in the euro area and business sentiment in Germany both worsened in September. Spanish bonds declined even as the government introduced new austerity measures. French bonds advanced as President Francois Hollande raised taxes and cut spending to reduce the deficit.

“We have expansionary monetary policy so that is supporting” bunds, said Alessandro Giansanti, an analyst at ING Groep NV in Amsterdam. “As long as the European Central Bank does not start first to reduce liquidity from the market and start to increase rates. As long as that’s not going to happen you will have a supportive environment for German yields.”

Germany’s 10-year yield fell 15 basis points, or 0.15 percentage point, this week to 1.44 percent at the 5 p.m. close in London yesterday. The 1.5 percent bond due September 2022 gained 1.41, or 14.10 euros per 1,000-euro face amount, to 100.53. The yield dropped 14 basis points this quarter.

An index of executive and consumer sentiment in the euro area dropped to 85 this month from 86.1 in August, the European Commission said Sept. 27. The Ifo institute in Munich said on Sept. 24 its business climate index slid to the lowest level since February 2010.

Austerity Package

Spain’s bonds fell even as Prime Minister Mariano Rajoy’s nine-month-old government announced its fifth austerity package on Sept. 27 in an effort to shrink the euro-area’s third-biggest budget deficit.

Spain’s 10-year yields climbed 18 basis points this week to 5.94 percent, the biggest gain since the period ended Aug. 31.

French government bonds advanced for the first week in more than a month as Hollande’s first annual budget raised taxes on the rich and big companies and included a minimum of spending cuts to reduce the deficit.

The French 10-year yield declined 10 basis points to 2.18 percent after dropping to 2.17 percent yesterday, the least since Sept. 11.

German bunds returned 1.1 percent in the third quarter through Sept. 27, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities rose 4.2 percent and Italy’s gained 5.6 percent.

The ECB will meet in Ljubljana, Slovenia, to review monetary policy on Oct. 4. Spain will sell two-, three- and five-year notes the same day. France will auction bonds due between 2018 and 2041, also on Oct. 4.