German Bond Yields in Narrowest 2013 Range on U.S. Budget Talks

Germany’s 10-year bond yields were in their narrowest range this year as investors refrained from taking positions while U.S. lawmakers struggled to end a 16-day partial government shutdown and avert a default.

An auction of German two-year notes attracted the biggest demand since 2011 as investors sought Europe’s safest assets. Leaders in the Senate are trying to lock down an agreement to end the fiscal impasse, stepping in after House Republicans’ last-minute plan to avert a U.S. government default as early as tomorrow collapsed. Investors may turn to European assets as the standoff erodes the reserve status of America’s debt, according to Pacific Investment Management Co.

“Investors are taking a wait and see stance until they get a clearer picture of where things are heading,” said John Stopford, head of fixed-income at Investec Asset Management Ltd. in London. “I still think at this point there are reasons for optimism that a deal will be reached.”

Benchmark German 10-year bund yields were little changed at 1.92 percent as of 1:35 p.m. London time, the highest since Sept. 24. The price of the 2 percent security due in August 2023 was at 100.70.

The difference between today’s low and high yield was 1.8 basis points, according to data compiled by Bloomberg. That compares with an average 5.7 basis points this year. A basis point is 0.01 percentage point.

Italy’s 10-year yield was little changed at 4.25 percent. The rate on similar-maturity Spanish bonds was at 4.30 percent.

Emerging Accord

The emerging Senate accord may come today, though passage in the Republican-led House is far from assured and Fitch Ratings yesterday placed the U.S.’s AAA credit rating on a negative watch. The framework is being negotiated by Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell. The U.S. borrowing authority is due to lapse tomorrow.

Germany sold 4.24 billion euros of notes maturing in September 2015 at an average yield of 0.19 percent, attracting bids equivalent to 2.25 times the amount allotted. That’s the highest bid-to-cover ratio since a sale in July 2011. Germany last auctioned two-year securities on Sept. 18 at 0.22 percent.

“The next biggest liquid markets in the world are here in Europe, so ultimately it’s going to be relatively beneficial for European assets, be it equities or fixed income,” Andrew Bosomworth, managing director at Pimco in Munich, said in an interview with Anna Edwards and Mark Barton on Bloomberg Television’s “Countdown.”

Inflation Expectations

Consumer prices in the 17 countries that share the euro rose an annual 1.1 percent after a 1.3 percent increase in August, the European Union’s statistics office in Luxembourg said. That’s in line with Eurostat’s preliminary estimate on Sept. 30. The reading also matched the median of estimates in a Bloomberg News survey.

Germany’s 10-year break-even rate was little changed at 1.65 percentage points, compared with the 2013 average of 1.70 percentage points. The rate, a market gauge of inflation expectations, is derived from the yield difference between bunds and index-linked securities.

Irish bonds gained as the government unveiled a budget that showed it decided to ease the pace of fiscal consolidation for next year to foster growth. The structural consolidation package to be implemented was revised to 2.5 billion euros instead of 3.1 billion euros originally planned.

Ireland’s 10-year yield dropped four basis points to 3.66 percent. The extra yield investors demand for holding the Irish bonds instead of similar-maturity German bunds shrank five basis points to 173 basis points. The spread was at 210 basis points at the end of September.

German bonds lost 2.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spanish securities returned 9.3 percent and Italy’s gained 5.6 percent.

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