Bunds Lead Gain in European Bonds Amid Bets Fed to Delay Taper

German bunds led gains in European government securities on bets the U.S. budget debate that threatened a default will prompt the Federal Reserve to maintain stimulus, underpinning the appeal of fixed-income assets.

German 10-year yields fell the most in three weeks as the White House said President Barack Obama signed a measure ending the 16-day U.S. government shutdown and extending the nation’s borrowing authority until early next year. Austrian, Dutch and Finnish bonds also advanced. France sold 8.38 billion euros ($11.5 billion) of notes and inflation-linked bonds, while Spain auctioned 2.5 billion euros of three- and five-year debt.

“Maybe December at the earliest is what the market was looking at for tapering, even that has been postponed now,” which is helping bonds, said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “There’s still a lot of uncertainty about the economic outlook.”

Germany’s benchmark 10-year yield dropped six basis points, or 0.06 percentage point, to 1.87 percent at 4:22 p.m. in London, the biggest decline since Sept. 24. The 2 percent bund maturing in August 2023 advanced 0.57, or 5.70 euros per 1,000-euro face amount, to 101.20.

Austrian 10-year yields dropped five basis points to 2.25 percent, similarly-maturity Dutch rates slipped six basis points to 2.23 percent and Finland’s also declined six basis points, to 2.11 percent.

Borrowing Limit

European bonds rallied with Treasuries after U.S. lawmakers yesterday agreed a plan to end the federal shutdown that started Oct. 1 and to raise the borrowing limit, avoiding a default. Congress produced the accord a day after Fitch Ratings said it may cut the U.S.’s AAA rating, citing the government’s inability to increase the ceiling in a timely manner.

The focus now shifts to a new series of deadlines -- the first for budget negotiations with a Dec. 13 target. The deal funds the government through Jan. 15, 2014 and suspends the debt limit through Feb. 7.

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

Germany’s 10-year yield may end the year little changed at 1.90 percent and increase to 2.10 percent by March 31, said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt. The yield will be at 1.93 at Dec. 31 and 2.08 percent at the end of the first quarter, according to the median predictions in Bloomberg News surveys.

French Auction

France sold notes maturing in February 2016 and November 2018 and inflation-linked securities due in 2023, 2027 and 2040. The nation sold the 2018 debt at an average yield of 1.24 percent, matching the level of an auction on June 20 that was the highest since April 2012.

Spain sold 1.6 billion euros of notes maturing in October 2018 at an average yield of 3.059 percent, down from 3.128 percent at a previous auction on Oct. 3. It allotted 900 million euros of debt due in July 2016 at 2.064 percent, versus 2.225 percent on Sept. 19.

Spain’s five-year yield fell four basis points to 3.08 percent after dropping five basis points yesterday. The nation’s 10-year yield was little changed at 4.30 percent.

‘Negative Returns’

European bond markets were expecting a resolution and underlying sentiment should stay positive for Europe’s higher-yielding debt markets, according to ING Groep NV.

“Since the U.S. partial government shutdown on Oct. 1 core markets have registered negative returns while peripheral markets have registered positive returns,” Padhraic Garvey, head of developed-market bonds strategy in Amsterdam, wrote in a note to clients. “We maintain our view that peripheral issuers such as Italy, Spain and Ireland have viable convergence targets towards the 150 basis-point area versus 10-year Germany.”

The extra yield that investors demand to hold Irish 10-year bonds over similar-maturity bunds widened five basis points to 177 basis points, the Italian spread widened two basis points to 233 basis points and Spain’s expanded seven basis points to 244 basis points.

German bonds handed investors a loss of 2.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. Austrian securities fell 1.7 percent and Dutch bonds dropped 2.7 percent.