German bonds declined, snapping an advance that pushed 10-year yields to the lowest in almost two weeks, as a report showed investor confidence in Europe’s largest economy increased to a four-year high this month.
Italian 10-year yields dropped to the least since Nov. 7 as optimism the economic recovery in the euro area is spreading boosted demand for higher-yielding government securities. Spain sold one-year debt at the lowest yield since Bloomberg started collecting the data in 2004, while the European Stability Mechanism, the euro area’s firewall fund, also sold bills.
“In terms of the expectations, the ZEW was slightly bearish for German bonds,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “It’s back at a level we haven’t seen for a while so there’s encouragement there. Unless something unexpected happens we think we are going to be rangebound between now and the end of the year.”
Germany’s 10-year bund yield rose four basis points, or 0.04 percentage point, to 1.72 percent at 4:55 p.m. London time, after dropping three basis points yesterday. The rate earlier fell to 1.68 percent, the lowest since Nov. 7. The 2 percent bond maturing in August 2023 declined 0.36, or 3.60 euros per 1,000-euro ($1,352) face amount, to 102.48.
Spain’s 10-year yield rose one basis point to 4.09 percent after the nation sold 3.71 billion euros of 12-month bills to yield 0.678 percent. Italy’s 10-year yield was at 4.07 percent.
The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, rose to 54.6, the highest since October 2009, and up from 52.8 last month. The median prediction of 40 economists in a Bloomberg survey was for an increase to 54.
A composite gauge of euro-region manufacturing and services activity rose to 52 this month from 51.9 in October, according to a Bloomberg News survey of analysts before the data is released on Nov. 21. A reading above 50 indicates expansion. The European Commission in Brussels will say the same day that euro-area consumer confidence improved in November, according to a separate survey.
Europe’s economic recovery remains fragile with inflation expectations “solidly anchored,” European Central Bank policy maker Peter Praet said today at the Euro Finance Week event in Frankfurt. He said in an interview published on Nov. 13 that the ECB would consider all options to ensure price stability, and asset purchases are a potential option if needed.
The central bank cut its main refinancing rate to 0.25 percent on Nov. 7.
ECB Policy makers haven’t exhausted their options to counter low inflation, Executive Board member Joerg Asmussen said in an interview broadcast on Austria’s ORF radio.
“While I’d be very careful with such an instrument” as negative interest rates, he said, “I don’t want to fundamentally exclude it.”
Volatility on German bonds was the highest in euro-area markets today, followed by those of France and the Netherlands, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.
German government bonds lost 1 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s returned 11 percent and Italy’s earned 7.3 percent.