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Bunds Fall as Cyprus Studies Bailout Options; Spanish Bonds Rise

March 20 (Bloomberg) -- German government bonds fell, with 10-year yields climbing the most in three weeks, as speculation Cyprus will be able to renegotiate an international bailout damped demand for Europe’s safest fixed-income assets.

Benchmark bund yields climbed from near an 11-week low even as Germany’s borrowing costs fell as it sold 3.36 billion euros ($4.35 billion) of the securities at an auction. Spanish and Italian bonds advanced on speculation the debt crisis in Cyprus will be resolved, increasing investor appetite for the debt of so-called peripheral nations. The European Central Bank reaffirmed its commitment to offer funding to Cyprus yesterday, after the country’s lawmakers rejected a levy on bank deposits.

“We had a big move in bunds yesterday but things are stabilizing,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “Investors are waiting for some more news to get a better insight into what is going to happen. There are some factors which may be supportive of risk, including the ECB saying it would provide liquidity.”

German 10-year bund yields increased four basis points, or 0.04 percentage point, to 1.38 percent at 5 p.m. London time after increasing as much as six basis points, the most since Feb. 25. The 1.5 percent bond due February 2023 fell 0.375, or 3.75 euros per 1,000-euro face amount, to 101.04.

The two-year yield rose two basis points to 0.02 percent, after dropping to minus 0.006 percent yesterday, the lowest level since Jan. 2.

Delayed Deal

The ECB may delay a decision on whether to keep supplying Cypriot banks with emergency funds as it awaits clarity on the nation’s bailout, according to two people familiar with the deliberations.

The delay gives the Cypriot government and euro-area finance ministers five more days to formulate a deal to prevent the implosion of the island’s banks. The ECB has no interest in forcing a collapse before a political decision has been taken, the people said.

Cyprus is not a major problem for the global economy, said Laurence D. Fink, chief executive officer of BlackRock Inc., the world’s largest asset manager.

“It’s not a really major economic issue,” Fink said in a Bloomberg Television interview in Hong Kong. “It’s a $10 billion issue. It does remind us of the frailty of Europe. It does remind us that the European fix will be multiple years.”

“The ECB reaffirms its commitment to provide liquidity as needed within the existing rules” for Cyprus, the Frankfurt-based central bank said in a statement yesterday.

Solvent Banks

Bunds stayed lower even after German Chancellor Angela Merkel said Cyprus’s banking sector must contribute to the bailout and ECB Executive Board member Joerg Asmussen said in an interview with German weekly newspaper Die Zeit that the central bank can “only provide emergency liquidity to solvent banks.”

A preliminary deal to sell Cyprus Popular Bank Plc to Russian investors was reached, Kathimerini newspaper reported earlier, without citing anyone. The nation hasn’t reached any such deal, government spokesman Christos Stylianides said.

Spain’s 10-year bond yield declined seven basis points to 4.98 percent after rising 31 basis points during the previous five days. Italy’s 10-year yield dropped nine basis points to 4.64 percent.

Cyprus’s bonds rose for the first time this week, pushing the yield on the 4.625 percent security due February 2020 down 20 basis points to 12.21 percent. The bid price was 66.01, while the offer price was 68.985. The yield surged 374 basis points over the past two days.

Most Volatile

Volatility on Portugal’s bonds was the highest in euro-area markets today, followed by those of Finland and Belgium, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.

Germany sold 3.36 billion euros of 10-year bunds at an average yield of 1.36 percent, the Frankfurt-based Bundesbank said. That compares with a yield of 1.66 percent at the previous auction on Feb. 20 and a record-low 1.31 percent set in July.

Portugal’s borrowing costs also fell as it sold 1.2 billion euros of 18-month bills at an average yield of 1.506 percent, compared with 1.963 percent at a previous auction on Jan. 16. The debt agency also allotted 300 million euros of three-month securities at 0.757 percent.

German bunds handed investors a return of 0.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds lost 0.1 percent, while Spanish securities gained 3.1 percent.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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