Germany’s government bonds fell, underperforming all their euro-region peers, after a survey showing investor confidence in the nation increased this month reduced demand for the region’s safest assets.
German sovereign debt of all maturities declined, pushing 10-year yields to the highest level in seven weeks before the government sells 4 billion euros ($5.3 billion) of the securities tomorrow. French, Dutch, Finnish and Austrian bonds also slid before a report that economists said will show the euro area returned to growth last quarter. The extra yield investors demand to hold Italian and Spanish 10-year debt instead of German bunds shrank to the narrowest since 2011.
“We are underweight on German bunds as we have a negative outlook for the asset over the next three to six months,” said Willem Sels, U.K. head of investment strategy at HSBC Private Bank in London. “The German economy is moving in the right direction. On the periphery, the news is generally positive. That tightens credit spreads and possibly puts upward pressure on bund yields as well.”
The benchmark 10-year bund yield jumped 11 basis points, or 0.11 percentage point, to 1.81 percent at 4:28 p.m. London time, the highest since June 25. The 1.5 percent security due in May 2023 dropped 0.985, or 9.85 euros per 1,000-euro face amount, to 97.215.
Germany’s 30-year yields climbed as much as nine basis points to 2.60 percent, the most since March 2012, two-year rates climbed six basis points to 0.23 percent.
The ZEW Center for European Economic Research said its index of German investor and analyst expectations climbed to 42 from 36.3 in July. Gross domestic product in the euro area rose 0.2 percent in the three months through June, ending six quarters of contraction, a Bloomberg News survey showed before the data is released tomorrow.
“There’s a decent upside surprise on the confidence data, it’s a strong report and what that means is more pressure on bunds,” said Michael Leister, a senior fixed-income strategist at Commerzbank AG in London. “We’ve had a decent run of macro data over the past few weeks and sentiment has improved.”
Volatility on German government bonds was the highest in euro-area markets, followed by those of France and Austria, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
French 10-year yields increased 10 basis points to 2.35 percent, while similar-maturity Dutch rates also climbed 10 basis points, to 2.17 percent. Finnish rates also rose 10 basis points, to 2.05 percent.
Italian and Spanish bonds outperformed as optimism that growth is returning to the region underpinned demand for higher-yielding assets.
Italy’s 10-year yield added six basis points to 4.23 percent, while Spain’s rose one basis point to 4.49 percent.
The extra yield investors demand to hold Italy’s 10-year securities instead of German bunds shrank five basis points to 242 basis points after reaching 237, the narrowest since July 2011. The spread widened to a euro-era record of 575 basis points on Nov. 9, 2011.
Spain’s yield spread over German bunds contracted 10 basis points to 268 basis points after reaching 265 basis points, the least since August 2011. The difference surged to 650 in July 2012 amid speculation the country would need to seek a bailout.
“We’ve had pretty good data from Europe,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “Italian and Spanish GDP was better, the general macro picture has improved. Periphery government bonds are performing well,” he said, referring to the securities of Europe’s high debt and deficit nations.
Germany last sold 10-year bonds on July 17 at an average yield of 1.57 percent, compared with 1.55 percent at a previous auction on June 19.
German bonds lost investors 1.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italy’s securities returned 4.4 percent and Spain’s rose 7.3 percent.