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German Yields Reach 14-Month High as European Bonds Extend Slide

Spanish 10-Year Yields Exceed 5% as European Bonds Extend Slump
A Spanish national flag flies from a building on Cibeles square in Madrid. Photographer: Angel Navarrete/Bloomberg

June 24 (Bloomberg) -- European bonds extended declines from last week, sending Germany’s 10-year yield to a 14-month high, as concern the Federal Reserve will begin curbing its stimulus plan this year damped demand for fixed-income assets.

Italian two-year note yields jumped to the most in six months, while Spain’s 10-year yield climbed above 5 percent for the first time in almost 12 weeks. Belgium’s bonds dropped as the nation auctioned 2.71 billion euros ($3.5 billion) of debt, while those of France also tumbled. Sovereign securities around the world have tumbled since Fed Chairman Ben S. Bernanke said June 19 U.S. policy makers may begin paring asset purchases this year and end them in mid-2014.

“The market remains anxious that Fed exit policy will be a painful affair for bonds,” said Rainer Guntermann, a rates strategist at Commerzbank AG in Frankfurt. “There’s little sign of stabilization and the market is vulnerable.”

Germany’s 10-year yield climbed nine basis points, or 0.09 percentage point, to 1.82 percent at 4:25 p.m. London time after touching 1.85 percent, the highest since April 4, 2012. The 1.5 percent bund due in May 2023 fell 0.835, or 8.35 euros per 1,000-euro face amount, to 97.135.

Euro-region bonds also declined as talks among the 27-member bloc’s finance ministers on setting up unified banking rules stalled over the weekend in Luxembourg. They failed to agree on assigning losses at failing banks as part of proposed rules on bank resolution and recovery. The officials will regroup June 26, before European Union leaders gather the next day for a summit in Brussels.

‘Not Supportive’

“Markets are starting to look at the impact on those markets from a generally higher yield environment in terms of higher borrowing costs,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. “If you add the disappointment about direct bank recapitalization, the environment is clearly not supportive for long-dated peripherals in my view. I’m in the camp of steeper curves as a proxy for risk-off trades, especially in the periphery.”

While Spanish yields have climbed this month, they are still down from a euro-era record 7.75 percent on July 25. The rate on similar-maturity Italian bonds climbed to as high as 7.48 percent in November 2011.

Italy’s 10-year yield climbed as much as 22 basis points to 4.84 percent, the highest since March 28, while the two-year rate added as much as 27 basis points to 2.26 percent, the most since Dec. 11.

Spanish Yields

The yield on Spain’s 4.4 percent bond due in October 2023 climbed 16 basis points to 5.10 percent after increasing to 5.13 percent, the highest level for a benchmark 10-year security since March 28.

The extra yield investors demand to hold Italian 10-year bonds instead of similar-maturity German debt increased as much as 12 basis points to 301 basis points, the most since April 19. The Spanish-German spread reached 330 basis points, also the widest since April 22.

Germany’s Ifo institute said today its business climate index climbed to 105.9 from 105.7 in May, in line with the median estimate of 46 analysts in a Bloomberg News survey.

Belgium auctioned 915 million euros of 10-year securities at an average yield of 2.762 percent. It last sold the 2.25 percent bonds maturing in June 2023 on May 28 at 2.143 percent, up from a record-low auction yield of 1.971 percent in April. The nation also sold debt maturing in 2018, 2019 and 2026.

Belgium, France

The rate on Belgian 10-year securities climbed as much as 31 basis points to 2.94 percent, pushing the yield spread over German bunds as much as 20 basis points wider to 111 basis points, the most since Oct. 3.

The yield on French 10-year bonds climbed as much as 21 basis points to 2.53 percent, the highest since July 5.

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

German bonds handed investors a loss of 1.6 percent in the past month, according to Bloomberg World Bond Indexes. Spanish securities fell 3.4 percent and Italian bonds slipped 3.5 percent, the indexes show.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net

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

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