German Notes Fall on Economy Optimism as Italian Spread Narrows

Germany’s two-year notes declined for the first time in four days amid signs the global economic recovery is gathering pace, damping investor demand for the safest government assets.

The extra yield that investors get for holding Italian 10-year securities instead of German bunds narrowed to the least since January as a report showed Italy’s industrial orders increased in March more than economists predicted. German 10-year yields approached the highest in seven weeks and Dutch bonds snapped a two-day gain.

“Bunds are certainly trading on the rich side,” said Norbert Aul, a European rates strategist at Royal Bank of Canada in London. “What we’ve seen already over the past week is bunds trying to push higher in yield terms, and that’s only been derailed when we got specific weak data.”

Germany’s two-year note yield increased two basis points, or 0.02 percentage point, to minus 0.01 percent at 4:26 p.m. London time. The zero percent security maturing June 2015 lost 0.04 or 40 euro cents per 1,000 euro ($1,286) face amount to 100.01. A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.

The 10-year yield rose four basis points to 1.37 percent, after climbing to 1.41 percent on May 15, the most since March 25. Yields fell to a record-low 1.127 percent in June.

Italian Orders

Italian industrial orders increased 1.6 percent in March after slipping 2.5 percent in February, the statistics office in Rome said. The median forecast of four analysts in a Bloomberg News survey was for a 0.6 percent gain.

A report on May 23 will show a gauge of services and manufacturing in the euro area improved in May even as the measure stayed below the 50 level that marks expansion, according to a separate Bloomberg survey.

The rates on Italian 10-year bonds and similar-maturity Spanish debt were little changed, at 3.90 percent and 4.21 percent, respectively.

The yield spread between Italy’s 10-year bonds and German bunds shrank three basis points to 254 basis points after contracting to 250 basis points, the narrowest since Jan. 30. The extra yield investors demand to hold similar-maturity Spanish bonds instead of bunds fell four basis points to 284 basis points.

Germany is due to sell 5 billion euros of new bonds due in May 2023 on May 22.

Austrian Debt

Bunds also underperformed their Austrian counterparts with the yield difference between the countries’ 10-year bonds narrowing to as low as 33 basis points today, the least since April 16. France’s yield premium over bunds dropped to 51 basis points from 53 basis points last week.

The Standard & Poor’s 500 Index gained 1 percent on May 17 after a report showed confidence among American consumers climbed this month to the highest level in almost six years. The stock index was little changed today.

Federal Reserve Chairman Ben S. Bernanke is scheduled to speak to the Joint Economic Committee of Congress on May 22 and the Federal Open Market Committee will release the minutes of its April 30-May 1 meeting on the same day.

“Overall for the day, there’s a risk-on sentiment,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “Everyone’s going to be waiting for the combination of the FOMC minutes and Bernanke’s speaking to the senate. The overall theme for us is a continual grind tighter of peripheral spreads.”

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

The yield on Dutch securities maturing in July 2023 increased four basis points to 1.68 percent and that on Finland’s 10-year security gained three basis points to 1.58 percent.

Italian government bonds returned 5 percent this year through May 17, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German securities gained 0.4 percent.

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