German Bonds Fall as Investors Favor Their Higher-Yielding Peers

  • Spanish, Italian notes have been rallying from Brexit slide
  • German bunds helped lower by increase in euro-zone inflation

German bonds, favored for their perceived safety, are trailing their higher-yielding peers as global markets continue to come to terms with the new, post-Brexit reality.

Spanish and Italian bonds, sought out by investors when they’re willing to take more risk, have climbed for most of this week, after tumbling in the immediate aftermath of the U.K.’s June 23 referendum. Germany’s 10-year bunds fell Thursday, helped lower by a stronger-than-forecast rebound in euro-zone inflation.

Italy’s securities extended their gain after the nation met its maximum target of 6.75 billion euros ($7.5 billion) at an auction of debt securities. Spanish bonds held onto gains from earlier in the week that were driven by an election that put Mariano Rajoy on course for a second term as prime minister, stemming an advance by populist parties.

“Relief is still ongoing” said David Schnautz, a London-based fixed-income strategist at Commerzbank AG in London. Now the referendum is a few days’ old, people “like to focus on something else” and Italy meeting its sales target “is a good omen.”

Spread Narrows

The yield premium that investors get for holding 10-year Spanish bonds instead of German securities narrowed to 1.36 percentage points -- below where it was on June 23, when Britons voted on their European future. That suggests investors are becoming more comfortable with post-referendum markets, where stocks have also pared their losses in the wake of the decision.

Benchmark German 10-year bund yields rose two basis points, or 0.02 percentage point, to minus 0.11 percent as of 2 p.m. London time. That’s the biggest increase since June 23. The 0.5 percent security due February 2026 fell 0.185, or 1.85 euros per 1,000-euro ($1,111) face amount, to 105.885.

Spain’s 10-year yield was little changed at 1.25 percent, having slid 37 basis points in the previous three days. Italy’s 10-year bond yield fell one basis point to 1.36 percent, leaving it 20 basis points lower this week.

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