German Bonds Fall as China Growth Pares Demand for Safer Assets

  • Worst China GDP since 2009 still beats economists' forecasts
  • Italy-German spread at 7-month low before Oct. 22 ECB decision

German government bonds fell, paring last week’s rally, after Chinese growth beat analysts’ forecasts last quarter, even though it was the worst result for the world’s No. 2 economy in six years.

Investors are just relieved the data, released Monday, “aren’t worse,” said Orlando Green, a fixed-income analyst at Credit Agricole SA’s corporate and investment-banking unit in London. The positive surprise reduced demand for the safety of fixed income and boosted European stocks.

The yield on Germany’s 10-year bund, the euro region’s benchmark government security, rose two basis points, or 0.02 percentage point, to 0.57 percent as of 4:48 p.m. in London, after sliding seven basis points last week. The 1 percent security due August 2025 dropped 0.18, or 1.8 euros per 1,000-euro ($1,132) face amount, to 104.13.

The extra yield paid by Italy’s 10-year bonds over their German peers shrank three basis points to 1.03 percentage points, the least since just after the ECB started its quantitative-easing program in March.

“If you look at stock and bond markets, there’s a moderate risk-on tone at the moment,” said Green. “Chinese growth wasn’t as low as some were expecting. Markets are almost relieved.”

China’s gross domestic product expanded 6.9 percent in the three months through September from a year earlier, beating economists’ estimates for 6.8 percent, as a stronger services sector and robust consumption helped offset weakness in manufacturing and exports. That was still the slowest growth since the first quarter of 2009.

Yields on bonds from the euro-zone’s peripheral nations of Spain and Italy have fallen toward German securities amid speculation the ECB will expand its 1.1 trillion-euro quantitative-easing program. Investors will be watching the bank’s Oct. 22 policy decision to see whether ECB President Mario Draghi will maintain the dovish stance he’s taken in recent speeches.

“We see more spread tightening,” said Luca Cazzulani, senior fixed-income strategist at UniCredit SpA in Milan. For the Italy-Germany spread, “we have a target of below 100 basis points by the end of this year.”

While Draghi is unlikely to spring any surprises this week, “he will sound dovish, in the sense that he will keep suggesting the ECB will do more if needed,” Cazzulani said.

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