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German Bunds Advance on U.S. Budget Concern; Italian Bonds Drop

Germany’s 10-year bunds rose for a second day as concern that U.S. policy makers will fail to avert a series of tax increases and spending cuts that may trigger a recession fueled demand for safer assets.

Finland’s bonds also gained as U.S. House Republican leaders canceled a scheduled vote on Speaker John Boehner’s plan to allow higher tax rates for annual incomes above $1 million, throwing budget negotiations deeper into turmoil. Italian and Spanish 10-year securities declined.

“People are concerned again about the fiscal cliff,” said Ralf Umlauf, a research analyst at Landesbank Hessen-Thueringen in Frankfurt. “We see no signs of a solution and that is providing some support for bunds.”

German 10-year bund yields fell four basis points, or 0.04 percentage point, to 1.38 percent at 4:16 p.m. London time. They climbed to 1.46 percent on Dec. 19, the highest since Nov. 27, and are headed for a three basis-point increase on the week. The 1.5 percent bond maturing in September 2022 rose 0.335, or 3.35 euros per 1,000-euro ($1,317) face amount, to 101.085.

U.S. House members and senators won’t vote on budget matters until after Christmas, giving them less than a week to avert the tax increases and spending cuts of more than $600 billion set to take effect in January.

Consumer Sentiment

Bunds also rose as a report showed German consumer confidence will fall for a second month in January. Nuremberg, Germany-based market research company GfK SE said today its consumer-sentiment index will drop to 5.6 from a revised 5.8 this month. That’s the lowest since December 2011.

German government bonds are poised to deliver returns for a seventh consecutive quarter as the debt crisis and concern that the euro-region will struggle to grow next year underpins demand for top-rated fixed-income assets. The securities climbed 0.5 percent so far this quarter, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Volatility on Finnish debt was the highest among euro-area nations tracked by Bloomberg, followed by that of the Netherlands and Germany, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Finnish Sales

Finland will probably continue its policy of selling two new euro-denominated benchmark bonds a year, as it seeks to meet a net funding need of 7.5 billion euros in 2013, the Treasury in Helsinki said today. It said on Nov. 28 it would sell five-year and 10-year bonds in euros next year. The nation also plans as many as four so-called tap auctions in 2013, with the first one in the first quarter, the Treasury said today.

Finland’s 10-year yields fell four basis points to 1.59 percent.

Italian 10-year yields climbed four basis points to 4.47 percent. The rate increased three basis points yesterday. The yield on similar-maturity Spanish bonds rose two basis points to 5.25 percent.

French bonds maintained a two-day gain, with the extra yield that investors demand to hold 10-year securities instead of German bunds widening two basis points to 60 basis points, still down from 153 basis points in January.

“French bonds have performed well,” Francis Yared, head of European rates strategy at Deutsche Bank AG in London, said in an interview on Bloomberg Television’s “The Pulse” with Maryam Nemazee. “Relative to fundamentals, they are on the expensive side. We prefer to be long Italy and Germany versus France,” he said. A long position refers to a bet that an asset’s price will rise.

French 10-year yields were little changed at 1.99 percent.

Euro-region government bond markets will be closed from Dec. 24 through Dec. 26, according to the website of Eurex, a derivatives exchange unit of Frankfurt-based Deutsche Boerse AG.

Cyprus Downgrade

Standard & Poor’s cut Cyprus’s long-term debt rating to CCC+ from B, the third downgrade in five months, citing a rising risk of default as the government’s short-term financing is “increasingly vulnerable.”

Cyprus, the fifth euro-area nation to seek a financial rescue, faces a more serious fiscal situation than Greece, Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro-area finance ministers, said last week. The Cypriot government is negotiating with the euro area and the International Monetary Fund for aid.

“One could argue the downgrade was expected,” said Athanasios Vamvakidis, head of Group-of-10 foreign-exchange strategy at Bank of America Merrill Lynch in London. “The most likely scenario is a deal will be reached with Cyprus after they get a new government in February.”

The nation’s 4.5 percent bond maturing in April 2017 rose for a second day, pushing the yield down 23 basis points to 12.61 percent.

German bunds returned 3.8 percent this year through yesterday, according to the EFFAS bond indexes. Italian debt earned 21 percent while Spanish bonds gained 6.3 percent.

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