German, Dutch Bonds Advance as Economy Gauge Shrinks

German bunds led gains among the euro area’s so-called core government securities after an industry report showed services and manufacturing in the region shrank this month at a faster pace than analysts forecast.

Benchmark 10-year yields dropped by the most since November as the Purchasing Managers’ Index added to signs Europe’s economy remained in recession at the start of the year. Dutch, Austrian and French bonds also advanced as investors sought out safer assets. Italian two-year notes fell for a fifth day before elections this month that may result in a hung parliament. Spanish borrowing costs declined as the nation sold 4.2 billion euros ($5.55 billion) of debt.

“There’s a lot of demand for the core that’s been driven by the macro data,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “The PMI in the euro-region was worse than expected. It indicates that growth is under pressure. That’s fueled a rally in bunds.”

Germany’s 10-year yield fell eight basis points, or 0.08 percentage point, to 1.58 percent at 4:38 p.m. London time, the biggest decline since Nov. 28. The 1.5 percent bund maturing in February 2023 rose 0.685, or 6.85 euros per 1,000-euro face amount, to 99.28.

Dutch 10-year yields declined six basis points to 1.83 percent. Those in France fell five basis points to 2.23 percent, and Austria’s dropped six basis points to 1.92 percent.

Composite Gauge

Markit Economics said its composite index based on a survey of purchasing managers in euro-area services and manufacturing industries fell to 47.3 for February from 48.6 the previous month. Economists forecast a reading of 49, according to a Bloomberg survey. A number below 50 indicates contraction.

The economy will shrink 0.1 percent this quarter, according to a Bloomberg News survey of economists on Feb. 15. The European Central Bank forecasts gross domestic product will contract 0.3 percent this year.

Italian two-year yields climbed the most in two weeks as candidates intensified campaigning before the Feb. 24-25 parliamentary elections.

Democratic Party candidate Pier Luigi Bersani has covered the length of the Italian peninsula this week to rally voters in the three must-win regions of Lombardy, Sicily and Campania. Bersani had 33.8 percent support in an SWG Institute survey published Feb. 8. That compares with 27.8 percent for former Premier Silvio Berlusconi and 18.8 percent for populist rival Beppe Grillo.

Italy’s two-year yield rose eight basis points to 1.70 percent after increasing as much as 12 basis points, the most since Feb. 4.

Spanish Sale

The Spanish Treasury sold securities maturing in March 2015, October 2019 and January 2023, surpassing its maximum target of 4 billion euros.

The two-year notes were sold at a yield of 2.54 percent, compared with 2.823 percent at the previous auction of the securities on Feb. 7. The 10-year benchmark yielded 5.202 percent, versus 5.29 percent in December.

“This is a strong set of results and continues the theme of decent demand for Spanish debt,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “We still believe this to be driven by the large amount of central bank liquidity in the system rather than an improvement in the fundamentals of Spain.”

Spanish 10-year yields were little changed at 5.20 percent after climbing as much as six basis points before the results were announced.

Prefer Spain

Investors should buy Spanish 10-year bonds while selling similar-maturity Italian securities before Italy’s election, betting the yield difference will narrow, said Simon Peck and Giles Gale, fixed-income strategists at Royal Bank of Scotland Group Plc in London. The so-called spread will shrink to 50 basis points from 71 basis points, they predicted.

France sold 7.98 billion euros of notes maturing between 2015 and 2018, as well as 2.3 billion euros of inflation-linked bonds due in 2024.

Volatility on France bonds was the highest in euro-area markets, followed by those of Germany and Austria, according to measures of 10-year debt, the spread between two-year and 10-year securities and credit-default swaps.

German government securities handed investors a loss of 1.7 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French debt also dropped 1.7 percent, while Spanish securities returned 2.3 percent, the indexes show.

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