European Bonds Gain Before Growth Report as Yield Curve Steepens

German National Flags Fly near the Reichstag
The yield difference, or spread, between German five-year notes and 30-year bonds was within one basis point of the highest level in more than 16 years after the European Central Bank unexpectedly cut its key interest rate to a record low last week. Photographer: Krisztian Bocsi/Bloomberg

European government bonds rose, with German 10-year yields snapping their biggest gain in two months, before a report this week that economists said will show euro-area growth slowed in the third quarter.

The yield difference between German five-year notes and 30-year bonds was within two basis points of the widest in more than 16 years after the European Central Bank unexpectedly cut its key interest rate to a record last week. Spanish and Italian bonds also rose. Portuguese bonds rallied after Moody’s Investors Service revised the nation’s bond-rating outlook to stable from negative. The U.S. Treasury market is closed for Veterans’ Day.

“The economy is in the early stages of a soft recovery in the euro zone, so we believe the ECB should have the current interest-rate level for a long time,” said Ralf Umlauf, head of floor research at Helaba Hessen-Thueringen in Frankfurt. “In the short term, current yield levels should be realistic” and be maintained until year-end, he said.

Germany’s 10-year yield was little changed at 1.75 percent at 4:25 p.m. London time after rising seven basis points on Nov. 8, the most since Sept. 5. The 2 percent bond due August 2023 climbed 0.025, or 25 euro cents per $1,000-euro ($1,340) face amount, to 102.18.

‘Extended Period’

The ECB lowered its main refinancing rate to 0.25 percent after a report on Oct. 31 showed annual inflation in the euro area slowed to 0.7 percent, the least since November 2009.

ECB President Mario Draghi pledged to keep borrowing costs low for an “extended period” and said weakening price pressures justified the ECB’s decision to cut interest rates.

The yield difference between German five- and 30-year securities was little changed today at 200 basis points. The spread closed at 201 basis points on Nov. 7, the highest since 1997, based on closing prices.

The prospects of easier policy from the ECB is supporting shorter-dated securities while those with longer maturities are reflecting an increase in yields globally as the U.S. Federal Reserve considers slowing stimulus, said Marc Ostwald, a rates strategist at Monument Securities Ltd. in London.

“The problematic for the long end is the relationship to other markets,” Ostwald said. “The front end is the bit that has performed in the last three months and the long end is under a bit of upward drag from upwardly moving yields in the U.S.”

Fed Purchases

Treasury 30-year yields fell to a 2013 low of 2.81 percent on May 1 and have since jumped more than a percentage point to 3.84 percent amid bets the Fed is moving closer to cutting bond purchases. The U.K. 30-year yield has risen about 70 basis points from its low for this year, reached in April.

U.S. yields extended their gains after the Fed said at its Oct. 29-30 meeting the economy showed signs of “underlying strength.” Analysts predict the Fed will maintain its $85 billion of monthly bond buying at the current pace until March, according to a Bloomberg survey conducted Oct. 17-18.

Euro-area gross domestic product rose 0.1 percent in the third quarter from 0.3 percent in the previous three months, according to a Bloomberg News survey before the data is released on Nov. 14.

Spanish 10-year yields dropped one basis point, or 0.01 percentage point, to 4.10 percent. The rate on similar-maturity Italian bonds also fell one basis point, to 4.13 percent.

Moody’s raised its outlook on Portugal’s Ba3 rating on Nov. 8. The general government debt ratio will start to decline from an elevated level of close to 129 percent of gross domestic product from 2014 onward, according to a Moody’s statement.

The Portuguese 10-year yield fell 13 basis points to 5.82 percent after declining to 5.79 percent Nov. 8, the lowest level since June 6.

German securities lost 1.4 percent this year through Nov. 8, according to Bloomberg World Bond Indexes. Spain’s returned 11 percent and Italy’s earned 6.9 percent.

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