German Bonds Advance After Industrial Production, Praet Comments

Germany’s 10-year government bonds rose, with yields falling from near a three-week high, as data showed European industrial production slid in September more than analysts predicted, spurring bets on more stimulus.

Italian two-year note yields slid to a six-month low after European Central Bank executive board member Peter Praet was quoted in the Wall Street Journal as saying officials could consider asset purchases. Italy’s 10-year bonds rose even after the nation sold 5.5 billion euros ($7.4 billion) of debt maturing between 2016 and 2044. Janet Yellen is scheduled for a confirmation hearing tomorrow to lead the Federal Reserve.

“The euro-area industrial production data was disappointing, which casts doubt on the strength of the upturn and that’s giving bunds a little bit of support,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Essentially we are waiting for Yellen’s testimony tomorrow. Until then the market will be stuck in a narrow range.”

Germany’s 10-year bund yield fell five basis points, or 0.05 percentage point, to 1.74 percent at 4:39 p.m. London time after climbing to 1.79 percent yesterday, the highest since Oct. 23. The 2 percent bond maturing in August 2023 rose 0.485, or 4.85 euros per 1,000-euro face amount, to 102.35. The rate on two-year notes due in September 2015 dropped two basis points to 0.082 percent.

Germany allotted 4 billion euros of zero percent securities due in December 2015 in an auction today at an average yield of 0.1 percent, compared with 0.19 percent when the nation sold the September 2015 notes on Oct. 16.

Output Falls

Industrial production in the 17-nation euro area dropped 0.5 percent in September after rising 1 percent in August, the European Union’s statistics office in Luxembourg said today. The median estimate of 32 economists in a Bloomberg News survey was for a 0.3 percent decline.

The ECB cut its main refinancing rate to 0.25 percent on Nov. 7. The annual inflation rate in the euro area slowed to 0.7 percent last month, the lowest since November 2009, data showed on Oct. 31. The inflation target is 2 percent. Inflation erodes the purchasing power of the fixed payments from bonds.

“If our mandate is at risk we are going to take all the measures that we think we should take to fulfill that mandate,” Praet was quoted as saying in the Wall Street Journal article. “That’s a very clear signal.”

Italy’s two-year yield fell five basis points to 1.21 percent after reaching 1.19 percent, the lowest since May 3. Rates on similar-maturity Spanish debt declined for a sixth day, falling three basis points to 1.37 percent.

Fed Bets

Bund yields dropped six basis points on the day of the ECB decision, and then jumped the following day as a report showed the U.S. economy added more jobs last month than forecast, fueling bets that Fed policy makers will trim $85 billion in monthly purchases of Treasury and mortgage debt. Yellen, who was named last month to succeed Chairman Ben S. Bernanke, will express her views publicly for the first time in seven months on the record stimulus she’s supported when she testifies to the Senate Banking Committee.

“After the recent selloff it would make sense to have a limited recovery,” said Patrick Jacq, a senior strategist at BNP Paribas SA in Paris. “The fact that bund yields rose significantly opened the door for some correction. For the bund, it will depend on the evolution in the U.S.”

Italian Auction

Italy sold 1.5 billion euros of bonds due in 2044 at an average yield of 4.99 percent. The Rome-based Treasury also auctioned 3 billion euros of 2016 securities and 1 billion euros of floating-rate notes maturing in 2018.

Italy’s 10-year yield dropped four basis points to 4.12 percent, while the rate on similar-maturity Spanish bonds fell two basis points to 4.10 percent.

Volatility on Dutch bonds was the highest in the euro-area markets, followed by those of the Netherlands and France, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps. Dutch 10-year yields fell five basis points to 2.08 percent.

German government bonds lost 1.6 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s returned 11 percent and Italy’s earned 6.8 percent.

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