German Bunds Fall as Greece Loan Speculation Damps Safety Demand

Germany’s bunds fell for the first week in five as optimism European leaders are taking steps to stem Greece’s fiscal crisis damped demand for the euro-area’s safest assets.

Ten-year yields rose to the highest in two weeks before euro-area finance ministers hold a conference call today to prepare for a Nov. 26 meeting on an updated aid package for Greece. While making “good progress” at talks in Brussels on Nov. 20-21, European Union lawmakers differed over how to plug a 14 billion-euro ($18.1 billion) gap in a Greek debt-reduction plan, German finance minister Wolfgang Schaeuble said in Berlin on Nov. 21. Greece’s 10-year yields fell to an eight-month low.

“There are expectations of an agreement on loans to be released for Greece and that has driven bund yields higher,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “I expect the selloff will continue and yields to move towards the upper-end of the trading range around 1.60 percent by year-end.”

German 10-year bund yields climbed 11 basis points from Nov. 16 to 1.44 percent at 5 p.m. London time yesterday, after rising to 1.45 percent, the highest level since Nov. 7. The 1.5 percent bond maturing in September 2022 dropped 0.96, or 9.60 euros per 1,000-euro face amount, to 100.58. The two-year yield rose three basis points in the week to minus 0.002 percent, after reaching 0.017 percent on Nov. 22, the most since Nov. 2.

At the Brussels gathering, finance ministers failed to tackle the dual task of steering the extra funding to Greece while finding a way to tame the resulting increase in the nation’s debt.

Greek Loans

Greece, facing a sixth year of recession in 2013, has been negotiating with the euro area and International Monetary Fund over the steps needed to qualify for the release of loan instalments frozen since June.

German Chancellor Angela Merkel said on Nov. 21 she saw a chance for a Greek aid deal as soon as next week, while Schaeuble said the Eurogroup is united on the idea of a bond buyback for Greece, although some “technical questions” remained open.

The yield on Greece’s 2 percent bond maturing in February 2023 plunged to the lowest since the nation’s debt was restructured in March. The rate dropped 1 percentage point this week to 16.48 percent after falling to 16.10 percent on Nov. 22.

France’s 10-year bond yields climbed nine basis points from Nov. 16 to 2.16 percent, the biggest increase in seven weeks, after Moody’s Investors Service lowered the nation’s credit rating by one level to Aa1 from Aaa on Nov. 19, citing a worsening economic growth outlook. Standard & Poor’s affirmed the country’s AA+ rating in a statement yesterday and maintained a negative outlook on its debt.

German bonds returned 3.4 percent this year through Nov. 22, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt also earned 3.4 percent and French securities gained 8.4 percent.