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European Bonds Drop as BOE’s Weale Signals Rate Increase in 2015

European government bonds fell, with benchmark German 10-year yields climbing the most in two weeks, after Bank of England policy maker Martin Weale said U.K. interest rates may rise as soon as early 2015.

French and Dutch securities also dropped amid speculation the policy of central banks around the world of keeping borrowing costs near zero is moving closer to ending. Italian and Spanish bonds declined as a survey of euro-area purchasing managers showed manufacturing and services slowed this month, damping demand for the region’s higher-yielding securities. Spanish bonds extended losses as the nation sold a combined 5.01 billion euros ($6.87 billion) of five-, 10- and 30-year debt.

“Today there were two drivers, first weak euro-zone data driving up the market in the morning, so this explained the rally, particularly the PMI surveys came weaker than expected,” said Rainer Guntermann, a fixed-income strategist at Commerzbank AG in Frankfurt. “In the afternoon there was another trigger, which came from the U.K. official talking about rate hikes.”

Germany’s 10-year yield rose three basis points, or 0.03 percentage point, to 1.69 percent at 4:32 p.m. London time, the biggest increase since Feb. 6. The 1.75 percent bond due in February 2024 declined 0.295, or 2.95 euros per 1,000-euro face amount, to 100.52.

French 10-year yields climbed four basis points to 2.30 percent and Dutch rates rose four basis points to 1.93 percent.

‘Very Helpful’

“It is very helpful that we try and explain that the most likely path for interest rates is that the first rise will come perhaps in spring next year,” Weale said in a Sky News television interview. After the first increase, “then the path is likely to be relatively gradual,” he said.

The European Central Bank cut its key interest rate to a record 0.25 percent in November and left its benchmark at that level at its most recent meeting on Feb. 6. The Bank of England’s Official Bank Rate is 0.5 percent.

Spanish 10-year bonds dropped for a second day after London-based Markit Economics said its composite index of euro-area services and manufacturing slid to 52.7 from 52.9 in January. Analysts surveyed by Bloomberg News forecast an increase to 53.1. Readings above 50 indicate growth.

People ‘Worried’

“Everybody was optimistic at the start of the year, and in the past few weeks we’ve had weak economic data from the U.S., from China and from Europe, and now people are worried that global growth is getting slower,” said Christian Reicherter, a research analyst at DZ Bank AG in Frankfurt.

Spain’s 10-year yield increased five basis points to 3.61 percent and Italy’s climbed seven basis points to 3.67 percent.

Spain sold 1.98 billion euros of 10-year bonds at an average yield of 3.559 percent, the lowest since January 2006. The Madrid-based Treasury also allotted 30-year securities at 4.519 percent, the least since December 2008, and five-year notes at 2.263 percent.

“The auction went well despite the fact that the valuation of some peripheral bonds is looking a bit stretched,” said Alessandro Giansanti, a senior rates strategist at ING Bank NV in Amsterdam. “The overall picture remains positive for Spanish bonds in terms of sentiment.”

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

Bonds of Europe’s high-debt and deficit nations have rallied this year, pushing yields from Greece to Portugal to the lowest levels since at least 2010 amid optimism the region’s debt crisis is easing.

France auctioned 7.98 billion euros of notes maturing in July 2016, October 2017 and May 2019. The debt office allotted the five-year securities at an average yield of 1.06 percent, compared with 1.24 percent at a previous sale on Jan. 23.

Spain’s bonds returned 3.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italian securities earned 3.4 percent and Germany’s gained 2 percent.

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