German Bunds Have First Weekly Drop Since June on Growth Outlook

German government bonds declined for the first week this month as a purchasing managers’ index signaled euro-area manufacturing expanded in July for the first time in two years, reducing demand for the safest assets.

The benchmark 10-year yield climbed to a two-week high as a euro-area services gauge and a German confidence report also exceeded analyst estimates. The additional yield investors demand to hold Belgian 10-year debt over bunds shrank to the least in two weeks, while French and Austrian securities also outperformed their German counterparts.

“Strong euro-area PMIs have been a significant driver for higher bund yields,” said Norbert Aul, a European rates strategist at Royal Bank of Canada in London. “We expect the tightening of semi-core spreads against bunds to extend,” with subdued supply scheduled in the weeks ahead, he said.

Germany’s 10-year yield rose 15 basis points, or 0.15 percentage point, to 1.67 percent at 5 p.m. London time yesterday, after rising to 1.69 percent on July 25, the highest since July 9. The price of the 1.5 percent bond due in May 2023 fell 1.31, or 13.10 euros per 1,000-euro ($1,328) face amount, to 98.515.

German debt has returned 0.8 percent this month, according to Bloomberg World Bond Indexes. It underperformed Belgian securities’ 1.9 percent gain and French debt’s 1.4 percent increase, as industry data showed signs of economic recovery.

Economic Expansion

The euro-area manufacturing PMI rose to 50.1 from 48.8 in June, London-based Markit Economics said on July 24. A reading above 50 indicates growth. The services index increased to 49.6 from 48.3, exceeding analysts’ forecasts. The Ifo Institute’s German business climate index, based on a survey of 7,000 executives and published a day later, increased to 106.2 from 105.9 in June.

Belgian 10-year yields increased five basis points to 2.57 percent, reducing the additional yield investors get for holding the securities instead of bunds by 10 basis points to 90 basis points. The spread reached 86 basis points on July 25, the narrowest since July 9. French 10-year yields rose nine basis points to 2.28 percent and Austria’s increased 11 basis points to 2.08 percent.

Belgium will auction securities due between 2018 and 2041 on July 29. Italy, which has the euro area’s biggest debt market, plans to offer a combined 6.75 billion euros of bonds next week including new benchmark securities. It is also set to pay about 34 billion euros of bond coupons and redemptions to investors next month, according to data compiled by Bloomberg.

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