German Bunds Rise on Decline in Confidence; Spain Auctions Bills

Germany’s 10-year government bonds advanced for the third time in four days as investor confidence in Europe’s largest economy unexpectedly declined this month, supporting the case for central-bank action to stimulate growth.

Two-year yields slipped as a report showed that inflation in the euro area stayed below the European Central Bank’s 2 percent target in June. Bund yields approached the lowest in four weeks before Federal Reserve Chairman Ben S. Bernanke’s testimony to Congress tomorrow amid speculation he’ll give more details on when U.S. stimulus will be slowed. Spanish two-year notes rose as the country sold 4 billion euros ($5.25 billion) of short-term debt.

“If there is an economy that needs further accommodation, it is the European economy,” said Michael Markovich, head of global interest-rate strategy at Credit Suisse Group AG in Zurich. “The bund seems well priced now. Political uncertainty is still a big problem and this should weigh negatively on the periphery,” he said, referring to bonds from the region’s lower-rated nations.

Germany’s 10-year bund yield fell three basis points, or 0.03 percentage point, to 1.55 percent at 4:49 p.m. London time after dropping to 1.54 percent on July 12, the lowest since June 19. The 1.5 percent bond due in May 2023 advanced 0.27, or 2.70 euros per 1,000-euro face amount, to 99.565. The two-year yield also declined three basis points, to 0.09 percent.

German Confidence

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, fell to 36.3 from 38.5 in June. That’s the first decline in three months. Economists forecast an increase to 40, according to the median of 37 estimates in a Bloomberg News survey.

The Spanish two-year note yield fell four basis points to 2.03 percent, while the rate on similar-maturity Italian debt was little changed at 1.70 percent.

Spain sold 1.63 billion euros of six-month bills and 2.42 billion euros of one-year bills.

Annual consumer-price growth in the euro region quickened to 1.6 percent from 1.4 percent in May, in line with an initial estimate on July 1, the European Union’s statistics office in Luxembourg said today. Prices rose 0.1 percent in the month, while the annual core-inflation rate, excluding volatile costs such as energy, alcohol and tobacco, was 1.2 percent.

ECB President Mario Draghi this month took what he called an “unprecedented” step and told investors that interest rates would stay low as the economy struggles to emerge from recession. The ECB’s benchmark rate is a record low 0.5 percent.

Bernanke Testimony

Bernanke is scheduled to deliver his semi-annual monetary policy report to Congress this week, starting tomorrow at the House Financial Services Committee. The Fed purchases $85 billion of Treasuries and mortgage debt each month as part of its quantitative-easing program to cap borrowing costs.

“Investors are in wait-and-see mode ahead of Bernanke’s key semi-annual testimony,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Bunds should be confined to a narrow trading range today.”

Volatility on Belgian bonds was the highest in euro-area markets today 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.

German bonds handed investors a loss of 0.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spanish securities returned 5.5 percent and Italy’s gained 2.3 percent, the indexes show.

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