Germany’s Bonds Decline as ECB’s Draghi Fails to Reverse Selloff

Germany’s bonds fell this week, pushing 10-year yields to a 17-month high, as European Central Bank President Mario Draghi failed to convince investors interest rates will remain low amid global economic growth.

Austrian, French and Dutch 10-year yields all climbed to the highest in more than a year as most government bond markets across the euro region tumbled along with Treasuries. Draghi said the ECB “expects the key ECB interest rates to remain at present or lower levels for an extended period of time,” at a press conference in Frankfurt on Sept. 5. Reports showed manufacturing in the euro area and China expanded last month.

“We’ve seen the European Central Bank’s not willing to pick a fight with the market,” said Gianluca Salford, a fixed-income strategist at JPMorgan Chase & Co. in London. “The selloff in European bonds this week was in part the by-product of the weakness in the Treasury market. We expect the strong economic data in Europe to remain a powerful catalyst, pushing yields higher in core markets.”

Germany’s 10-year bund yield climbed nine basis points, or 0.09 percentage point, this week to 1.95 percent as of 5 p.m. London time yesterday after reaching 2.05 percent, the highest since March 21, 2012. The 1.5 percent security due in May 2023 dropped 0.8, or 8 euros per 1,000-euro ($1,317) face amount, to 96.065. The rate on the nation’s two-year note increased three basis points from Aug. 30 to 0.27 percent.

ECB Decision

The ECB kept its benchmark interest rate at a record-low 0.5 percent at its Sept. 5 meeting as Draghi said risks to the region’s economic outlook remain on the downside.

A euro-area index based on a survey of purchasing managers in the manufacturing industry increased to a 26-month high of 51.4 from 50.3 in July, Markit Economics said on Sept. 2. A gauge of Chinese manufacturing advanced to 50.1 last month from 47.7 in July. Readings above 50 signal expansion.

Bund yields also climbed as the rate on Treasury 10-year notes rose above 3 percent yesterday amid speculation the Federal Reserve will slow its bond-buying program when policy makers meet on Sept. 17-18.

Euro-area government bonds pared their declines after a report yesterday showed U.S. employers added fewer workers in August than economists forecast.

France’s 10-year yield increased eight basis points this week to 2.55 percent, after touching 2.64 percent on Sept. 5, the highest since July 2, 2012. At an auction of 10-year debt on Sept. 5, the nation’s borrowing costs rose to the most since President Francois Hollande was elected in May 2012.

The rate on Austria’s 10-year bonds added nine basis points to 2.39 percent, while similar-maturity Dutch yields increased nine basis points to 2.38 percent after reaching 2.47 percent yesterday, the highest since April 2012.

Germany is scheduled to auction 5 billion euros of bunds maturing in August 2023 on Sept. 11. The Netherlands is due to offer 10-year securities on Sept. 10, while Italy plans to sell bonds on Sept. 12.

German bonds lost 3.1 percent this year through Sept. 5, according to Bloomberg World Bond Indexes. Italian securities returned 2.9 percent, while Spain’s earned 7.2 percent.

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