Euro-Area Bonds Extend Selloff as Debt Supply Saturates Market

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Germany’s government bonds declined, extending a selloff that wiped more than $400 billion off the value of global debt in about three weeks, on concern sales from Asia to the U.S. will overwhelm demand for sovereign securities.

Bonds across the euro area reversed earlier gains. Germany allotted 2.5 billion euros ($2.8 billion) of benchmark 10-year bunds and Italy sold 7 billion euros of debt due between 2018 and 2046 on Wednesday. The U.S. is offering a total of $64 billion of Treasuries this week, while Japan and the U.K. will also auction government debt.

“It is a function of supply on the day, plus pending supply in the U.S., the U.K. and Japan,” said Peter Chatwell, a rates strategist at Mizuho International Plc in London. “In its current fragile state, the bond market is unable to absorb supply very well. The market is still thin on the bid side and vulnerable to further near-term corrections lower.”

German 10-year bund yields rose five basis points, or 0.05 percentage point, to 0.72 percent at the 5 p.m. close in London after declining as much as eight basis points earlier on Wednesday. The yield has surged from a record-low 0.049 percent set as recently as April 17. The 0.5 percent security due in February 2025 fell 0.46, or 4.60 euros per 1,000-euro face amount, to 97.895.

Bonds across the globe have tumbled in May, in defiance of the European Central Bank’s quantitative-easing program that is soaking up 60 billion euros of securities a month.

Yields Surge

The average euro-area yield climbed to 82 basis points on Tuesday, according to Bank of America Merrill Lynch Indexes. That’s almost double its record low of 0.43 percent, reached two months earlier.

Spanish 10-year bond yields rose five basis points to 1.88 percent, after jumping 17 basis points over the previous two days. The yield on similar-maturity Italian debt added four basis points to 1.89 percent.

The increases in Spain and Italy’s yields should be viewed as “a correction, not a wholesale reversal,” according to Nicholas Gartside, the London-based chief investment officer for fixed-income at JPMorgan Asset Management Inc., which has $1.7 trillion of assets under management.

“There’s life in the old bond dog yet,” Gartside said in interview on Bloomberg Television’s Countdown with Anna Edwards and Manus Cranny. “You look at those bond yields and there’s no reason they couldn’t be half current levels from where they are now.”

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