Bunds Advance Before ECB Meeting as Spanish Notes Rise

Germany’s bonds rose, with 10-year yields approaching the lowest level in a week, as investors sought safer assets amid concern the region’s debt-crisis will intensify amid widening political divisions.

Italian 10-year yields climbed to the highest this year as former Prime Minister Silvio Berlusconi narrowed Pier Luigi Bersani’s lead to within the margin of error of an opinion poll before this month’s election. The extra yield investors demand to hold French 10-year bonds instead of bunds approached the widest in a month as Germany dismissed calls by French President Francois Hollande to steer the euro’s exchange rate. A German report today showed factory orders expanded in December.

While sentiment in Europe has improved “the divergence between Germany and the rest of the euro zone is becoming more and more apparent,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “We have the political, the economic situation and all of that will keep bunds high in demand, at least for the next couple of months.”

Germany’s 10-year yield fell two basis points, or 0.02 percentage point, to 1.63 percent at 4:17 p.m. London time after dropping to 1.59 percent yesterday, the lowest level since Jan. 25. The 1.5 percent bond due in February 2023 rose 0.16, or 1.60 euros per 1,000-euro ($1,354) face amount, to 98.775.

Merkel, Hollande

As German Chancellor Angela Merkel travels to Paris today to meet Hollande on the eve of European Union budget talks, German government spokesman Steffen Seibert told reporters in Berlin that exchange-rate policy “isn’t an appropriate instrument” to boost competitiveness.

Hollande broke with Germany’s market-based approach yesterday to say the euro area must use the currency as an export-promoting tool, as the U.S. and China do.

“The level of the euro is eating away all the efforts” France is making to improve its competitiveness, Industry Minister Arnaud Montebourg said at a conference today in Paris.

The extra yield of French 10-year bonds over those of Germany increased two basis points to 65 basis points after expanding to 66 basis points yesterday, the widest since Jan. 3.

German factory orders climbed 0.8 from November, when they fell 1.8 percent, the Economy Ministry said in Berlin. The median forecast in a Bloomberg News survey of economists was for a 0.7 percent gain.

Italian Bonds

Italian bonds declined as a daily tracking poll by Tecne institute for SkyTG24 showed Berlusconi reduce Bersani’s lead to 3.7 percentage points from 4 percentage points yesterday. That’s the first time he’s moved within the margin of error of an opinion poll before the Feb. 24-25 elections. Bersani led by 14 percentage points on Jan. 2.

Italy’s 10-year yield climbed 10 basis points to 4.56, the highest since Dec. 28. Two-year yields increased six basis points to 1.69 percent.

The European Central Bank will tomorrow keep its main refinancing rate at 0.75 percent, according to all 60 economists surveyed by Bloomberg. President Mario Draghi may discuss the shrinking of the central bank’s balance sheet after financial institutions last month started repaying funds borrowed through its longer-term refinancing operations.

“The highlight for the rest of the week should be the ECB meeting,” said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt. “We can expect some comments on the LTRO.”

Dutch Rating

The Dutch 10-year yield was little changed at 1.84 percent after Fitch Ratings yesterday cut the outlook on the country’s AAA debt rating to negative from stable.

About half the time, government bond yields move in the opposite direction suggested by new ratings, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974.

Germany sold 3.72 billion euros of five-year notes today at an average yield of 0.68 percent. It last auctioned the securities on Jan. 9 at 0.53 percent.

German government bonds have gained 3.4 percent during the past year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities returned 13 percent and Spain’s gained 4.7 percent.

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