Germany led declines among Europe’s top-rated government bonds amid bets the Federal Reserve will refrain from an aggressive stimulus cut, sapping demand for the region’s safer assets.
The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity German bunds shrank to the least in two years. Austrian, Dutch and Finnish securities fell for a second day. The Federal Open Market Committee will reduce Treasury purchases to $40 billion, while continuing to buy $40 billion of mortgage-backed bonds, according to the median estimate of economists in a Bloomberg News survey. Spain plans to sell 3 billion euros ($4 billion) of debt tomorrow.
“The Fed will try to be on the dovish side to avoid a strong increase in yields,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “We are getting back to a normal world where investors are looking at where can we get some return rather than just a preservation of capital? The transition is ongoing and is going to put some more upward pressure on bund yields.”
German 10-year yields increased four basis points, or 0.04 percentage point, to 2.01 percent at 4:23 p.m. London time after reaching 2.02 percent, the most since Sept. 13. The 2 percent bund maturing in August 2023 fell 0.37, or 3.70 euros per 1,000-euro face amount, to 99.955.
The extra yield investors demand to hold Spain’s 10-year bonds instead of German bunds shrank four basis points to 240 basis points, after dropping to 239, the narrowest since July 5, 2011. The spread of Italian securities over bunds contracted four basis points to 240 basis points, having dropped to 237, the least since Aug. 23.
Among 64 economists surveyed by Bloomberg News, 33 predict the Fed will reduce its purchases of Treasuries by $5 billion or less, with 31 forecasting a cut of $10 billion or more. The central bank will announce its decision at the end of a two-day meeting at 2 p.m. in Washington.
Core government bonds also dropped after the minutes of the Bank of England’s Sept. 3-4 policy meeting, showed that “no member judged that further stimulus was appropriate at present.” The Monetary Policy Committee voted 9-0 to keep the bond-purchase program at 375 billion pounds ($599 billion) and the benchmark interest rate at a record-low 0.5 percent. U.K. gilts fell, pushing the 10-year yield toward a two-year high.
“We’ve had a positive move in equity markets and BOE minutes that were slightly more positive, not seeing a need for more stimulus,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “That’s pushing fixed income lower in the euro zone. If we’re going to have no more stimulus from the BOE and tapering from the Fed then that makes it more difficult for the ECB to remain very dovish.”
Yields on the Netherlands’ 10-year bonds increased four basis points to 2.36 percent, while those on similar-maturity Finnish securities climbed four basis points to 2.22 percent. Austria’s 10-year yield added four basis points to 2.39 percent.
Volatility on German bonds was the highest in euro-area markets today, followed by those of Austria and the Netherlands, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
Germany’s two-year notes declined by the most in almost two weeks as the nation sold 4.22 billion euros of the securities at an auction. The rate climbed three basis points to 0.24 percent, the biggest increase since Sept. 5, based on closing prices.
Investors should favor Treasuries over German bonds because the higher yield on the U.S. securities doesn’t reflect the Fed’s commitment to keep interest rates near record lows while the American debt will probably benefit from any upsurge in risk aversion, according to Nomura Holdings Inc. analysts.
“Across rates markets, Treasuries have normalized faster and we argue that it has overshot fundamentals,” George Goncalves, Guy Mandy and Jeffrey Young wrote in a note dated yesterday. “The rise in risk premium since May provides more evidence that tapering is priced in, while European risk premium is currently low.”
Spain is due to auction securities due in 2016 and 2028 tomorrow. The nation last sold the three-year notes maturing in July 2016 on Aug. 1 at an average yield of 2.636 percent. France is scheduled to sell a combined 7.5 billion euros of debt due in 2015, 2016 and 2018 tomorrow, as well as 1.7 billion euros of inflation-linked bonds.
German securities lost 2.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spanish bonds earned 8.5 percent, while Italy’s returned 3.8 percent.