German Bonds Rise Seventh Day Before Fed; Italy Securities Fall

Germany’s government bonds rose, with 10-year securities gaining for a seventh day, as economists predicted the U.S. Federal Reserve will maintain debt purchases at a policy meeting ending today.

Benchmark bunds extended their winning streak to the longest in more than two years as a report showed Germany’s annual inflation rate slowed to the least since April. German borrowing costs fell to the lowest since July at a sale of 10-year debt. Italy’s bonds dropped as the nation sold 6 billion euros ($8.25 billion) of five- and 10-year securities. Spanish securities also declined, reversing gains that were spurred by data showing the economy exited recession last quarter.

“We’ve seen the highs for core rates this year and the path of least resistance is lower,” said Padhraic Garvey, head of developed-market bonds strategy at ING Groep NV in Amsterdam. “The situation in the euro zone has improved but remains weak. U.S. tapering is not really a story for this year.”

Germany’s 10-year yield fell five basis points, or 0.05 percentage point, to 1.69 percent at 4:30 p.m. in London, the lowest level since Aug. 12. The 2 percent bund due in August 2023 rose 0.465, or 4.65 euros per 1,000-euro face amount, to 102.775. The winning streak is the longest since the period ended Aug. 4, 2011.

The benchmark yield has dropped eight basis points this month, extending a decline from 2.09 percent on Sept. 11, which was the highest since December 2011.

Fed Decision

The Fed will keep purchases of Treasuries and mortgage-backed securities at $85 billion a month until March, according to a Bloomberg News survey of analysts on Oct. 17-18. The Federal Open Market Committee refrained from reducing stimulus last month, saying it was waiting for further evidence of economic recovery.

Germany’s annualized inflation rate, calculated using a harmonized European Union method, dropped to 1.3 percent this month from 1.6 percent in September, the Federal Statistics Office said. The median forecast in a Bloomberg survey was for 1.5 percent. Slower inflation helps preserve the purchasing power of the fixed payments from bonds.

Germany’s 10-year break-even rate narrowed two basis points to 1.63 percentage points. The rate, a gauge of inflation expectations that is derived from the yield difference between bunds and index-linked securities, has averaged 1.7 percentage points this year.

Germany allotted 3.41 billion euros of bonds maturing in August 2023 at an average yield of 1.71 percent, the lowest since an auction on July 17. The nation last sold 10-year debt on Oct. 2 at 1.79 percent.

Most Volatile

Italy sold 3 billion euros of bonds maturing in March 2024 at an average yield of 4.11 percent, down from 4.50 percent at a previous auction on Sept. 27. The Rome-based Treasury also sold billion euros of five-year notes at 2.89 percent, versus 3.38 percent last month.

Italian 10-year yields climbed four basis points to 4.18 percent after falling to 4.09 percent on Oct. 23, the lowest level since June 5.

The extra yield investors demand to hold Italy’s 10-year bonds over German bunds widened nine basis points to 249 basis points after expanding beyond 250 basis points for the first time since Oct. 10.

Spanish Bonds

Spanish bonds advanced in earlier trading after the Madrid-based National Statistics Institute said gross domestic product rose 0.1 percent from the second quarter, when it fell 0.1 percent, matching the central bank’s Oct. 23 estimate.

Spain’s 10-year yield dropped as much as two basis points to 4.02 percent, the lowest since May 6, before rising two basis points to 4.06 percent.

The Spanish government pays interest and bond maturities of about 21 billion euros tomorrow.

“Looking forward is not as benign as we’ve had it over the last couple of days when we were still waiting for the redemption and coupon payments to be recycled,” said David Schnautz, a fixed-income strategist at Commerzbank AG in New York. Spain’s GDP data showed “no upside surprise to what we were expecting in terms of growth. We are certainly not yet out of the woods.”

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

German securities handed investors a loss of 1.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s gained 11 percent and Italy’s rose 6.5 percent.

Before it's here, it's on the Bloomberg Terminal.