German Bonds Lead Euro-Area Peers Lower as Stocks Dim Safety Bid

  • Portuguese yields rise from five-month low after election
  • German 10-year bunds drop before debt sale this week

Germany’s government bonds led their euro-area counterparts lower amid a rebound in European stocks that dimmed demand for the relative safety of fixed-income securities.

The declines pushed up yields on Germany’s 10-year bunds, Europe’s benchmark, by the most in two weeks before the country auctions about 4.5 billion euros ($5.1 billion) of securities in the next two days. U.S. and U.K. government bonds also dropped as speculation the Federal Reserve will defer raising interest rates boosted stocks, commodities and emerging-market assets. The Stoxx Europe 600 Index of shares jumped 3 percent, the most since August.

Germany’s bonds trailed behind their higher-yielding peers from Italy to Spain as data adding to signs of an economic slowdown supported the case for more European Central Bank stimulus. Portuguese bonds ended an eight-day rally that preceded Sunday’s elections, which were set to hand Prime Minister Pedro Passos Coelho another term in office, helping to cement the fortunes of political parties which are carrying out austerity policies. Spanish bonds halted a two-day gain.

Market Sentiment

“The market doesn’t want to become too pessimistic” on the outlook for economies and higher-yielding assets, said Orlando Green, a fixed-income analyst at Credit Agricole SA’s corporate and investment-banking unit in London. “It seems somewhat extreme to keep buying the bund and core bonds at these yield levels.”

German bund yields increased five basis points, or 0.05 percentage point, to 0.56 percent as of 4:42 p.m. in London, after a slide of 14 basis points last week that was the most since December. The 1 percent security due August 2025 fell 0.53, or 5.30 euros per 1,000-euro face amount, to 104.17.

Europe’s largest economy is scheduled to auction 500 million euros of inflation-linked bonds due in April 2046 on Tuesday, followed a day later by a 4 billion-euro sale of benchmark August 2025 securities. Portugal plans to sell bonds in one or two auctions in the fourth quarter, its debt agency IGCP said Monday in statement on website.

Spain’s 10-year bond yield rose three basis points to 1.80 percent, after touching 1.74 percent, the lowest since May 22. That left the yield difference, or spread, with Germany at 124 basis points, after shrinking to 122 basis points, the least since Aug. 3. Portugal’s 10-year yield climbed one basis points to 2.31 percent, after touching 2.26 percent, the lowest since May 5. The yield dropped 30 basis points over the previous eight days.

The European Central Bank said three of its member institutions that help carry out 60 billion euros ($67 billion) a month of bond purchases will start using reverse auctions, similar to those employed by the Federal Reserve when it bought Treasuries as part of an expansionary monetary policy.

Markit Economics’ Purchasing Managers’ Index for manufacturing and services in the euro area fell to 53.6 last month from 54.3 in August, the London-based company said in a report on Monday. That’s below a Sept. 23 preliminary reading of 53.9. A level above 50 indicates expansion.

“What we expect in general is that peripheral bonds will remain underpinned,” said Mathias Van Der Jeugt, a fixed-income strategist at KBC Bank NV in Brussels. “The fact that the ECB is keeping its policy and even thinking of extending it keeps a floor on prices. The outcome of the Portuguese elections was in line with what was expected. The impact on markets should be limited.”

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