German Bunds Rise on U.S. Funding Deadlock; ESM Starts Bond Sale

German government bonds rose with haven assets around the world after U.S. Treasury Secretary Jacob J. Lew said Congress needs to increase the debt ceiling by Oct. 17 or the nation risks defaulting on its payments.

Benchmark 10-year bund yields dropped toward the lowest level in eight weeks as a government spokesman said Germany is monitoring the U.S. budget dispute “very closely.” Austrian, French and Dutch bonds also advanced. The European Stability Mechanism, the region’s permanent rescue fund, hired banks for its first bond sale. Portuguese notes rallied, sending two-year yields to the lowest in seven weeks.

“We are watching for developments in the U.S. and the lack of progress over the weekend seems to be slightly positive for bonds,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in Paris. “The market is slightly risk off. We don’t think the U.S. is going to default, for us that’s a very small probability.”

The 10-year bund yield fell four basis points, or 0.04 percentage point, to 1.80 percent at 5 p.m. London time after dropping to 1.74 percent on Sept. 30, the lowest level since Aug. 13. The 2 percent security due in August 2023 rose 0.345, or 3.45 euros per 1,000-euro ($1,358) face amount, to 101.765. The yield climbed six basis points last week.

Austrian 10-year yields declined four basis points to 2.19 percent, while similar-maturity Dutch rates fell three basis points to 2.19 percent. France’s also dropped three basis points, to 2.33 percent.

Budget Stalemate

The stalemate between the White House and House Republicans showed little sign of thawing just 10 days from when Lew told lawmakers the U.S. will exhaust measures to avoid breaching the debt ceiling.

The House and Senate weren’t in session yesterday and there were no meetings planned between the two sides. U.S. Speaker John Boehner said the House of Representatives can’t pass an increase to the debt ceiling without packaging it with other provisions -- something President Barack Obama has ruled out.

“We’re observing this situation very closely, just as the whole world is, and we hope that there can be an agreement between the government and the parties in Congress,” Steffen Seibert, a German government spokesman, told reporters in Berlin. “We hope there will be an agreement soon.”

ESM Sale

The ESM is selling five-year notes via banks, with HSBC Holdings Plc, JPMorgan Chase & Co. and Societe Generale SA leading the sale, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it.

The fund is planning to sell at least 3 billion euros of debt, Christophe Frankel, the fund’s chief financial officer, said in an interview with Euroweek, according to an Oct. 4 transcript.

Germany is scheduled to sell 1 billion euros of five-year inflation-indexed securities tomorrow. The nation also plans to auction 4 billion euros of five-year conventional notes Oct. 9.

Portugal’s two-year yield fell 14 basis points to 4.63 percent after declining to 4.62 percent, the lowest since Aug. 21. The 10-year yield declined two basis points to 6.38 percent.

A statement from the European Central Bank, European Commission and International Monetary Fund last week said approval of the eighth and ninth reviews of the country’s aid plan may take place next month.

An index measuring investor sentiment in the euro region fell to 6.1 this month from 6.5 in September, the Limburg, Germany-based Sentix research institute said today. Economists in a Bloomberg News survey predicted a reading of 8.5.

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

German bunds lost 1.9 percent this year through Oct. 4, according to Bloomberg World Bond Indexes. French securities dropped 1.2 percent and Dutch bonds fell 2.4 percent.

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