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German Bonds Fall Second Day on Euro-Area Output, Fed Minutes

German government bonds dropped for a second day after a euro-area report showed services output expanded in August for the first time in 19 months, adding to evidence the region is pulling out of its economic slump.

Benchmark 10-year bund yields climbed to the highest since March 2012 after Federal Reserve minutes released yesterday showed most policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to reduce debt purchases this year. French, Dutch and Austrian bonds also declined. German 10-year yields climbed to as high as 1.94 percent today, from this year’s low of 1.15 percent set on May 2. Italian and Spanish securities rose as investors sought higher-yielding assets.

“There’s increasing evidence that the euro zone is bouncing back from very depressed levels,” said Robin Marshall, director of fixed income at Smith & Williamson Investment Management in London. “It’s a reflection of improved confidence which is likely to push yields higher in the near-term. But it’s unclear how far bond rates can go from here given the region still has a number of hurdles to jump over in coming months.”

Germany’s 10-year yield rose five basis points, or 0.05 percentage point, to 1.92 percent at 4:27 p.m. London time. The rate increased three basis points yesterday. The 1.5 percent bond maturing in May 2023 fell 0.43, or 4.30 euros per 1,000-euro ($1,336) face amount, to 96.30.

France’s 10-year yield climbed five basis points to 2.48 percent, while similar-maturity Dutch rates rose four basis points to 2.32 percent and Austria’s increased four basis points to 2.34 percent.

Fed Purchases

The Fed will reduce its monthly purchases of $85 billion in bonds at its Sept. 17-18 meeting, according to 65 percent economists in an Aug. 9-13 Bloomberg survey. The median estimate is for a cut to $75 billion each month.

“Almost all committee members agreed that a change in the purchase program was not yet appropriate,” and a few said “it might soon be time to slow somewhat the pace of purchases as outlined in that plan,” according to the minutes of the Federal Open Market Committee’s July 30-31 gathering.

The Fed’s debate over when to scale back its stimulus has roiled financial markets around the world. Some policy makers have said the purchases, while helping reduce unemployment, are stoking excessive risk taking in assets such as junk bonds and leveraged loans.

“The focus is now shifting from when the Fed will start to taper their bond purchases to the pace of tapering,” said Willem Sels, head of investment strategy at HSBC Private Bank in London. “Bond yields in core markets, including those in Europe, may continue to rise amid speculation about the pace at which the Fed reduces its purchases.”

Output Expands

An index of euro-area services based on a survey of purchasing managers rose to 51 this month from 49.8 in July, London-based Markit Economics said. A composite index of services and manufacturing climbed to 51.7 from 50.5. Readings above 50 indicates expansion.

Gross domestic product in the euro region rose 0.3 percent in the three months through June after six quarterly contractions, according to data published on Aug. 14.

Spain’s 10-year yield dropped five basis points to 4.48 percent after climbing to 4.58 percent, the highest level since Aug. 7. The rate on similar-maturity Italian debt declined five basis points to 4.32 percent.

The extra yield investors demand to hold Italian 10-year securities instead of German bunds fell 10 basis points to 239 basis points. The spread narrowed to 227 on Aug. 19, the tightest since July 2011.

“The reasonably strong set of data has seen a great rotation-type scenario being traded,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “German bunds come under pressure as investors move into peripherals and equities.”

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

German securities lost 2.3 percent this year through yesterday according to Bloomberg World Bond Indexes. Italian bonds returned 3.8 percent, while Spain’s earned 7.4 percent.

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