German Notes Drop as Draghi Damps Rate-Cut Bets

German two-year notes erased an advance as European Central Bank President Mario Draghi said recent economic indicators signaled the euro region is through the worst of its economic slump.

Ten-year government bunds pared a gains after Draghi’s comments damped speculation the central bank would take additional measures to reduce borrowing costs, even as he pledged to keep interest rates low for an extended period. European bonds pared intraday gains as Treasuries tumbled after U.S. initial claims for unemployment insurance fell and a gauge of manufacturing rose. Spain’s bonds climbed as the nation exceeded its maximum target at a debt sale.

“The main reason for the market disappointment is simply that the forward guidance is undermined at this meeting because the ECB did not discuss a rate cut,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The market was looking for something more at this meeting, either more transparency in the forward guidance, or something more tangible on when or how minutes will be produced.”

Germany’s two-year note yields were little changed at 0.15 percent at 5 p.m. London time. The price of the zero percent security due June 2015 was at 99.71. Benchmark 10-year yields were at 1.67 percent after dropping as much as eight basis points, or 0.08 percentage point.

Becoming Positive

The ECB kept its benchmark rate at a record-low 0.5 percent, a decision predicted by all except one of 63 economists surveyed by Bloomberg News. Following the decision, Draghi pledged to keep interest rates low, citing subdued inflation and a weak economy. He also said that sentiment indicators showed signs of stabilization.

“They are becoming more positive on the normalization of financial markets and that’s filtering through into the real economy,” Elwin de Groot, senior market economist at Rabobank Nederland in Utrecht, the Netherlands, said of ECB policy makers. “Of course the market could read a positive signal in that if they are more confident about policy working its way through, then perhaps there’s no necessity of increasing the monetary accommodation.”

The yield on 10-year Treasury notes climbed 11 basis points to 2.69 percent as a report showed applications for unemployment insurance payments declined by 19,000 to 326,000 in the week ended July 27, the fewest since January 2008. The Institute for Supply Management’s manufacturing index increased to 55.4 in July from 50.9 a month earlier.

U.S. payrolls increased by 185,000 in July and the jobless rate fell to 7.5 percent from 7.6 percent, according to separate economist surveys before the Labor Department report tomorrow.

Spanish Auction

Spain’s bonds rose after the nation auctioned 3.2 billion euros of notes due in July 2016 and October 2018, exceeding its maximum target of 3 billion euros.

The yield on 10-year bonds fell three basis points to 4.62 percent, while those on five-year notes dropped four basis points to 3.28 percent.

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

German bunds lost 1.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italian securities returned 2.9 percent and Spain’s rose 6.3 percent.

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