German Bonds Advance as Stock Declines Boost Demand for Safety

Germany’s 10-year bonds rose for the first time in three days as a decline in stocks around the world underpinned demand for the safest fixed-income assets.

French and Dutch securities also gained amid speculation the U.S. Federal Reserve is moving toward ending its stimulus program that has helped support the global recovery. Bunds advanced even after a government report showed industrial production in Europe’s largest economy rose in June. Germany sold 3.32 billion euros ($4.42 billion) of five-year notes.

“The decline in stocks is providing some support for core assets such as German bonds,” said Jussi Hiljanen, head of fixed-income research at Skandinaviska Enskilda Banken AB in Stockholm. “Further drops in yields may be limited. Recent data out of Germany suggested the country is moving gradually in the right direction and that is consistent with higher bond rates in coming months.”

Germany’s 10-year bund yield fell one basis point, or 0.01 percentage point, to 1.69 percent at 4:38 p.m. London time after increasing to 1.73 percent on Aug. 2, the highest level since July 4. The 1.5 percent security due in May 2023 rose 0.08, or 80 euro cents per 1,000-euro face amount, to 98.28.

The French 10-year yield dropped two basis points to 2.25 percent and similar-maturity Dutch yields declined basis point to 2.08 percent.

Germany allotted securities due in April 2018 at an average yield of 0.64 percent, compared with 0.63 percent at the previous auction on July 3 and a record-low of 0.31 percent in August 2012.

Industrial Output

Fed Bank of Chicago President Charles Evans said yesterday he “would clearly not” rule out a decision to begin curbing bond purchases in September.

German industrial output increased 2.4 percent from May, when it fell a revised 0.8 percent, the Economy Ministry in Berlin said. Analysts forecast a gain of 0.3 percent, according to the median of 41 estimates in a Bloomberg survey.

The 10-year bund yield rose two basis points yesterday, approaching the highest level in four weeks, after a report showed German factory orders increased in June more than economists forecast.

Spanish government bonds have returned almost twice as much as Italy’s this year, reflecting investor bets that Spain’s recovery from recession will outstrip the moribund Italian economy.

Spain, Italy

Spain’s 10-year bond yields dropped to the lowest level in six weeks on Aug. 5 as evidence of a nascent recovery in the euro region bolstered demand for higher-yielding assets. The bonds also rallied after European Central Bank President Mario Draghi said last month that interest rates will remain low for an “extended period” to support the economy.

“We currently favor Spain over Italy and we think the outperformance can continue,” said Russel Matthews, a money manager at BlueBay Asset Management in London, which oversees $56 billion. “The fundamental picture in Spain is likely to improve more than in Italy. The economy is slightly more dynamic and has a better chance of taking off.”

Spanish bonds were little changed today, leaving 10-year yields at 4.57 percent. The rate fell to 4.54 percent on Aug. 5, the lowest since June 19. Similar-maturity Italian yields were also little changed, at 4.25 percent.

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

Belgium’s 10-year bond yield fell one basis point to 2.57 percent.

German bonds lost 1.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s securities returned 6.8 percent and Italy’s gained 3.9 percent.

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