German Bunds Rise on Euro-Area Discord; Spanish Bonds Advance
German bonds rose, with 10-year yields dropping to the lowest in more than a week, as discord among European leaders over ways to bring an end to the debt crisis boosted demand for the region’s safest assets.
Benchmark bunds extended their rally from last week as German Chancellor Angela Merkel and French President Francois Hollande clashed two days ago over a timetable for starting joint oversight of Europe’s banks. Spanish bonds gained amid speculation the government will request a bailout to fix its finances, ending weeks of deliberation. The spread between Dutch 10- and 30-year bonds widened after the government revised some rules for pension funds’ liabilities.
“Any time anyone with different priorities starts to get together and really drill down to what needs to be done, you end up with these differences of opinion,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “The bund remains the intra-euro-zone safe-haven asset of choice.”
Germany’s 10-year yield fell four basis points, or 0.04 percentage point, to 1.56 percent at 4:30 p.m. London time after declining to 1.55 percent, the lowest level since Sept. 13. The 1.5 percent bond due in September 2022 rose 0.36, or 3.60 euros per 1,000-euro ($1,292) face amount, to 99.48. The yield dropped 11 basis points last week.
The benchmark yield will decline to 1.50 percent by year- end, Wraith said, citing Merrill Lynch’s forecast.
Merkel and Hollande differed on a planned banking union meant to contain the sovereign debt crisis at a meeting near Ludwigsburg, Germany. The sooner it’s achieved, the better, Hollande said, while Merkel said it’s more important to ensure the plan is thorough.
Bunds also gained after an industry report showed German business confidence unexpectedly declined in September as the debt crisis damped the region’s economic growth.
The Ifo Institute in Munich said its business climate index, based on a survey of 7,000 executives, dropped to 101.4, the lowest since February 2010, from 102.3 in August. Economists predicted an increase to 102.5, according to a Bloomberg survey.
Spanish 10-year bonds advanced for a second day amid speculation the government of Prime Minister Mariano Rajoy will finally decide to request a bailout.
Rajoy must stop prevaricating and decide whether his nation needs a full rescue, Michael Meister, chief whip and finance spokesman for Merkel’s Christian Democratic Union, said in an interview with Bloomberg Television in Berlin.
“There’s still some expectation in the market that Spain may seek a bailout at one point, and some investors seem to be positioning themselves in a thin market ahead of what they see as a likely scenario,” said Richard McGuire, a fixed-income strategist at Rabobank International.
Spain’s 10-year yield dropped eight basis points to 5.69 percent after earlier rising as much as eight basis points to 5.85 percent.
Italy’s 10-year yield was little changed at 5.05 percent.
The extra yield investors demand to hold Dutch 30-year bonds instead of 10-year securities widened for a fourth day after the government and central bank said pension funds can change the way they calculate liabilities over 20 to 60 years.
The spread expanded two basis points to 73 basis points after reaching 75 basis points, the most since Sept. 14.
“The steepening should continue, as the rule change removes the pressure to hedge very long-term liabilities,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris.
A yield curve is a graph that charts the rates of bonds of a similar type with different maturities. It steepens when yields on shorter-dated debt fall, those on longer-dated bonds rise, or when both occur at the same time.
Germany and France both sold bills today and Belgium auctioned bonds.
Volatility on German bonds was the highest in euro-area markets today, followed by Finland, according to measures of 10- year or equivalent-maturity debt, the spread between two-year and 10-year securities and credit-default swaps.
German bonds returned 2.4 percent this year through Sept. 21, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities gained 1.6 percent, while Italy’s rose 15.3 percent.