German Bunds Rise as Unemployment Climbs; Italian Bonds Fall

Germany’s bonds rose, pushing 10-year yields to the lowest in eight weeks, as euro-area reports showing unemployment climbed to a record and manufacturing shrank boosted demand for the region’s safest securities.

Benchmark bunds extended a second weekly gain as the data added to evidence the recession in the 17-nation area is deepening. Italy’s bonds declined for the first time in three days as the nation’s jobless level climbed to the highest since at least 1992 and Democratic Party leader Pier Luigi Bersani ruled out an alliance with rival Silvio Berlusconi following inconclusive elections this week.

“German 10-year yields holding near 1.5 percent reflects the fact that the euro zone is still in a difficult environment,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. “The economic outlook remains poor and there is room for interest rates to fall further. There’s still systemic risk in Spain, Italy and Greece, supporting demand for safety.”

The German 10-year yield dropped three basis points, or 0.03 percentage point, to 1.42 percent at 3:46 p.m. London time after falling to 1.40 percent, the lowest since Jan. 2. The 1.5 percent bond due in February 2023 rose 0.275, or 2.75 euros per 1,000-euro ($1,301) face amount, to 100.695. The yield has declined 15 basis points this week.

Unemployment in the region climbed to 11.9 percent in January, the highest since the data series started in 1995, the European Union statistics office said. A gauge of manufacturing in the euro area based on a survey of purchasing managers held at 47.9 last month, below the level of 50 that divides growth from contraction, Markit Economics said.

Bund Returns

German government securities returned 1.3 percent in February, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities dropped 1.9 percent and Spain’s rose 0.8 percent.

Italy’s 10-year bonds extended a second week of losses as Rome-based national statistics office said the jobless rate rose to 11.7 percent in January from 11.3 percent in December.

Bersani told la Repubblica that he ruled out an alliance with Berlusconi and he plans a program of reforms to attract votes from all political parties.

A broad coalition government including Berlusconi’s People of Liberty party “would be the death” of the Democratic Party, Bersani said. “The hypothesis of a broad coalition doesn’t exist and will never exist,” he said.

Own Currency

Finnish Prime Minister Jyrki Katainen said the stalemate in Italy risks unraveling years of crisis-fighting work and German lawmaker Klaus-Peter Willsch said if a majority of Italians can’t be convinced to stand by European Monetary Union rules, the country must be allowed to return to its own currency.

“The Italian election is a wake-up call,” said Marchel Alexandrovich, a senior European economist at Jefferies International Ltd. in London. “The political uncertainty there just reminds the market of implementation and systemic risks still facing the euro area.”

Italy’s 10-year yield climbed six basis points to 4.79 percent, having risen 34 basis points this week.

The additional yield investors demand to hold Italian 10-year bonds instead of similar-maturity German bunds widened nine basis points to 337 basis points. The spread expanded to 351 basis points on Feb. 27, the most since Dec. 11.

Spanish bonds also declined, with the 10-year yield climbing one basis point to 5.11 percent.

Finnish bonds were the most volatile in euro-area markets, followed by those of the Netherlands and Austria, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.

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