German Yields Climb to 3-Week High as U.S. Lawmakers Seek Deal

Germany’s government bonds fell, pushing 10-year yields to the highest level in three weeks, as speculation that U.S. lawmakers will reach agreement on raising the nation’s debt limit damped demand for the safest assets.

Benchmark German bunds dropped for a second day and Finland’s AAA rated securities declined for a seventh session as House Speaker John Boehner was said to be ready to allow a vote on a Senate agreement to end the fiscal impasse and extend U.S. borrowing authority. Irish bonds rose as the government yesterday unveiled a budget that showed it decided to ease the pace of fiscal consolidation for next year to foster growth.

“The market appears to remain sanguine that a deal will be reached prior to any breach,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh “That reduced demand for safety. Gains in U.S. stock futures also put a bit of pressure on government bonds.”

The German 10-year yield rose two basis points, or 0.02 percentage point, to 1.93 percent at 4:48 p.m. in London after reaching 1.94 percent, the highest level since Sept. 23. The 2 percent security due in August 2023 fell 0.14, or 1.40 euros per 1,000-euro ($1,349) face amount, to 100.625.

The agreement being negotiated by Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell would fund the U.S. government through Jan. 15, 2014, and suspend the debt limit until Feb. 7. The U.S. borrowing authority is due to lapse tomorrow. The emerging Senate accord may be announced as early as today, after Fitch Ratings yesterday placed the U.S.’s AAA credit rating on a negative watch.

‘Timely Manner’

“The speaker will bring that agreement to the House floor in a very timely manner,” Representative Kevin Brady of Texas, a senior House Republican, said on Bloomberg Television today. He said he thinks the measure would pass. Senate leaders stepped in after House Republicans’ last-minute plan to avert a U.S. default collapsed.

Finland’s 10-year yield climbed two basis points to 2.17 percent and that of the Netherlands, also rated AAA, increased one basis point to 2.29 percent.

Ireland’s 10-year yield dropped five basis points to 3.64 percent. The extra yield investors demand to hold the securities instead of similar-maturity German bunds shrank seven basis points to 171 basis points. The spread was at 210 basis points at the end of September.

Irish Budget

Irish Finance Minister Michael Noonan yesterday sketched out 2.5 billion euros of tax increases and plans to narrow the fiscal deficit to 4.8 percent of gross domestic product in 2014 from 7.3 percent this year. The government is reducing the 3.1 billion euros of adjustments it had originally outlined for next year, trying to buttress signs of a recovery.

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

Investors may turn to European assets as the U.S. standoff erodes the reserve status of America’s debt, according to Pacific Investment Management Co.

“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.”

Germany sold 4.24 billion euros of two-year notes today 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.

German bonds lost 2.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Finnish securities dropped 2.3 percent and Dutch bonds fell 2.6 percent.

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