Germany’s government bonds fell as signs of strength in the U.S. economy add to the case for the Federal Reserve to reduce asset purchases, damping demand for fixed-income assets.
Ten-year bund yields climbed to the highest level in almost three weeks as the nation allotted 755 million euros ($1.01 billion) of inflation-linked bonds. Benchmark German securities dropped last week after a U.S. report showed employers added more jobs last month than economists forecast. Italian and Spanish bonds also declined. Italy sold one-year bills at a record-low yield today.
“It’s really the U.S. that is putting pressure on bunds,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “Tapering is back on the table. The jobs report last week changed the game completely. I think we are going to have bund yields between 1.7 and 1.9 percent for a while.”
Germany’s 10-year bund yield increased four basis points, or 0.04 percentage point, to 1.79 percent at 4:28 p.m. London time, the highest since Oct. 23. The 2 percent bond maturing in August 2023 fell 0.315, or 3.15 euros per 1,000-euro face amount, to 101.87.
The rate on similar-maturity U.S. notes climbed three basis points to 2.77 percent after rising to 2.79 percent, the highest since Sept. 18. That left the yield difference, or spread, versus German 10-year bunds at 98 basis points, after reaching 102, the widest since Aug. 22.
The U.S. Labor Department said last week employers in the world’s biggest economy added 204,000 workers in October, exceeding the median estimate for a 120,000 gain in a Bloomberg News survey.
Central bank officials will probably decide to pare purchases of Treasury and mortgage-backed securities to $70 billion a month at their March 18-19 meeting, according to the median of 32 economist estimates in a separate Bloomberg survey on Nov. 8. The Fed currently buys $85 billion of debt a month.
Germany sold 10-year inflation-linked bonds at an average real yield of 0.29 percent, compared with 0.36 percent at a previous auction on Sept. 10.
Italy sold 6.5 billion euros of one-year bills at a yield of 0.688 percent, down from 0.999 percent at the previous auction Oct. 10. That’s the lowest according to data compiled by Bloomberg going back to 1984.
The Netherlands allotted 1.955 billion euros of securities due in July 2023 at an average yield of 2.104 percent, versus 2.412 percent at a previous sale on Sept. 10.
Belgium, France, Greece and Slovenia also auctioned short-dated debt today.
The German annualized inflation rate, calculated using a harmonized European Union method, dropped to 1.2 percent last month from 1.6 percent in September, the Federal Statistics Office in Wiesbaden said today. That’s the lowest since April.
The European Central Bank cut its main refinancing rate to 0.25 percent on Nov. 7. The annual inflation rate in the euro area slowed to 0.7 percent last month, the lowest since November 2009, data showed on Oct. 31. The ECB’s inflation target is 2 percent. Inflation erodes the purchasing power of the fixed payments from bonds.
The yield on Spanish 10-year bonds rose one basis point to 4.11 percent, while the rate on similar-maturity Italian debt increased two basis points, to 4.15 percent.
Germany is scheduled to auction 5 billion euros of two-year notes tomorrow. It last sold the securities on Oct. 16 at an average yield of 0.19 percent, compared with a record-low minus 0.06 percent set in July 2012.
The two-year note yield was little changed at 0.1 percent today.
Volatility on Austrian bonds was the highest in the euro-area markets, followed by those of Belgium and Greece, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.
German securities lost 1.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s returned 11 percent and Italy’s earned 6.9 percent.