German Bonds Fall as Confidence Rises; Italy Outperforms Spain

German 10-year government bonds fell, pushing yields up from near the lowest level in two weeks, after data showing investor confidence rose to a three-year high sapped demand for the region’s safest assets.

Germany’s two-year notes snapped a four-day gain before the nation auctions 5 billion euros ($6.68 billion) of the securities tomorrow. Italian 10-year securities advanced, outperforming similar-maturity Spanish debt, as a gauge of euro-area investor confidence increased to the most since 2009. The Federal Reserve begins a two-day meeting in Washington at which policy makers are forecast to begin reducing stimulus.

“It’s a good sign for German economic developments,” said Ralf Umlauf, head of floor research at Helaba Hessen-Thueringen in Frankfurt. “We still believe that the Fed meeting tomorrow is overshadowing the market reactions because people are staying on the sidelines until after that. Tapering will be a burden on fixed-income markets.”

Germany’s 10-year yield increased four basis points, or 0.04 percentage point, to 1.97 percent at 4:24 p.m. London time after falling to 1.92 percent yesterday, the lowest since Sept. 3. The 2 percent bund maturing in August 2023 dropped 0.33, or 3.30 euros per 1,000-euro face amount, to 100.23.

The ZEW Center for European Economic Research in Mannheim said its index of German investor and analyst expectations, which aims to predict economic developments six months in advance, rose to 49.6 in September from 42 in August. That was the highest level since April 2010. Economists predicted a reading of 45, according to a Bloomberg News survey. An indicator of euro-area investor confidence increased to 58.6 from 44, the highest since September 2009.

Italy, Spain

Italy’s 10-year yield declined five basis points to 4.40 percent, dropping more than the rate on similar-maturity Spanish debt, which fell one basis point to 4.41 percent.

Italian 10-year yields rose above those of Spain for the first time in 18 months last week amid speculation a vote on whether to expel Silvio Berlusconi from Italy’s Senate will destabilize the coalition government. The first vote on Berlusconi’s mandate is due to take place in Rome tomorrow.

As recently as July investors demanded a yield premium of 42 basis points to hold Spanish 10-year bonds instead of Italy’s.

Fed Tapering

The Fed will reduce its asset purchases to $75 billion a month from $85 billion after its meeting ends tomorrow, according to a Bloomberg News survey of economists on Sept. 6.

Europe’s government bonds advanced yesterday as Lawrence Summers withdrew from the race to be the next Fed chairman, spurring bets the U.S. central bank will be slower to reduce stimulus. The former Treasury secretary would have tightened central bank policy more than Fed Vice Chairman Janet Yellen, who was his main rival to replace Chairman Ben S. Bernanke, according to a Bloomberg Global Poll conducted last week. Bernanke’s term ends on Jan. 31.

“It’s going to be a tricky trading environment until we get the Fed,” said Michael Leister, a senior rates strategist at Commerzbank AG in London. “Spreads at multi-year lows are going to run into some trouble because the improvement in the macroeconomic environment has been priced in. The spreads are probably as tight as they can get.”

The additional yield investors demand to hold Italian securities instead of German bunds narrowed eight basis points to 2.43 percentage points. The spread shrank to 2.27 percentage points in August, the lowest level since July 2011.

German Auction

Germany plans to sell 5 billion euros of notes due in September 2015 tomorrow. The nation last sold the securities on Aug. 21 at an average yield of 0.23 percent, the highest at an auction since March 2012.

The notes “offer limited relative value,” Citigroup Inc. strategists Mohit Aggarwal and Aman Bansa wrote in a note to clients. “However, it is likely to attract demand” because of the increase in yields, they wrote.

German two-year note yields were little changed at 0.22 percent after reaching 0.34 percent on Sept. 5, the most since March 2012.

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

German bonds lost 2.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italian securities returned 3.4 percent and Spain’s earned 8.4 percent.

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