Bund Bears Retreat as Greece, Fed Rate Outlook Underline Allure

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Little more than a week since Germany’s 10-year bond yields climbed to the highest in almost nine months, the bears are in retreat.

Yields on Europe’s benchmark sovereign debt have dropped more than 20 basis points since June 10, when they rose above 1 percent, amid speculation that the region’s leaders will fail to avert a Greek default.

The latest trigger for buying was news from the U.S. on Wednesday that prompted Goldman Sachs Group Inc. to push back its call for the first interest-rate increase by the Federal Reserve to December from September. Spanish and Italian securities advanced as a recent jump in yields attracted buyers.

“There’s risk aversion that has triggered flows into bunds,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. “Greece is dominating the news flow” and peripheral note yields have risen to “attractive” levels, he said.

German 10-year bund yields were little changed at 0.81 percent as of 4:23 p.m. London time. The price of the 0.5 percent security due February 2025 was 97.15 percent of face value. The yield dropped to 0.73 percent earlier on Thursday, the least since June 3. It has fallen from as much as 1.06 percent on June 10, the highest since September.

It’s a turnaround from a week ago when a combination of debt auctions and a brightening economic outlook prompted investors to question the wisdom of holding fixed-income securities. Sentiment had soured as inflation returned to the euro area and European Central Bank officials signaled that they were comfortable with heightened volatility and yields.

Greek Stalemate

With euro-region finance ministers meeting in Luxembourg Thursday in an attempt to resolve the standoff over Greek aid that has persisted since February, investors have turned to the relative safety of Germany’s government bonds. The nation is the largest contributor to Greece’s 240 billion-euro bailout.

Spain’s 10-year bond yield fell six basis points, or 0.06 percentage point, to 2.26 percent, having climbed from 1.84 percent at the end of May. The yield on Italian 10-year bonds dropped three basis points to 2.28 percent.

Spanish securities extended their advance along with Italy’s after Kathimerini newspaper reported that international creditors are working on the draft of a statement on Greek debt relief, to be used if an agreement is reached.

The Federal Open Market Committee cut its forecast for the U.S. main rate at the end of 2016 to 1.625 percent from 1.875 percent, and lowered its 2017 estimate to 2.875 percent from 3.125 percent. The central bank has kept borrowing costs at about zero since 2008.

Treasury 10-year note yields touched the lowest level since June 3.

“Events looks quite supportive of core markets here, with a dovish FOMC along with the threat of another failed Eurogroup meeting,” Peter Chatwell, a rates strategist at Mizuho International Plc in London, said in a note.

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