German Bunds Lead Decline in Europe Bonds as Manufacturing Grows

European government bonds declined after an industry report showed manufacturing in the region expanded for a fifth month in November, damping demand for the safety of fixed-income assets.

Germany’s 10-year yields climbed the most in three weeks after U.S. factory output rose the most since April 2011. French, Dutch and Austrian securities also declined. Spanish bonds fell after a gauge of manufacturing in the nation based on a survey of purchasing managers was lower than economists forecast. Portuguese two-year notes gained after the nation said it will carry out a bond exchange. Greece’s bonds rallied after Moody’s Investors Service raised its credit rating last week.

“The European PMIs were stronger than expected, apart from Spain, and this is weighing on bunds,” said Mathias Van Der Jeugt, a fixed-income strategist at KBC Bank NV in Brussels. “The data limits the chance that the European Central Bank will ease further.”

Germany’s 10-year yield rose five basis points, or 0.05 percentage point, to 1.74 percent at 4:47 p.m. London time, the biggest increase since Nov. 8. The 2 percent bond maturing in August 2023 declined 0.42, or 4.20 euros per 1,000-euro ($1,354) face amount, to 102.30.

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

Manufacturing Expands

An index of euro-area manufacturing improved to 51.6 from 51.3 in October, exceeding the previous estimate of 51.5 released on Nov. 21, Markit Economics said. The Institute of Supply Management said its gauge of U.S. manufacturing climbed to 57.3 in November from 56.4 the previous month. Readings above 50 indicate expansion.

French 10-year yields climbed two basis points to 2.17 percent, Dutch rates rose three basis points to 2.06 percent and Austria’s increased three basis points to 2.07 percent.

The extra yield investors demand to hold French 10-year securities over similar-maturity bunds shrank two basis points to 44 basis points, the lowest closing level since July 2011.

The European Central Bank will leave its main refinancing rate at a record-low 0.25 percent when policy makers meet in Frankfurt on Thursday, according to all 60 economists in a Bloomberg News survey.

Spain’s 10-year yield climbed four basis points to 4.16 percent, while the rate on Italy’s 10-year bonds increased two basis points to 4.08 percent.

Portuguese Exchange

Portuguese notes rose as the country said it will hold a bond exchange to reduce debt repayments due in the next two years as it approaches the end of its 78 billion-euro international bailout.

“The rationale for the exchange is to ease 2014 refinancing, given that next year will be a tough one for Portugal,” Chiara Cremonesi, a fixed-income strategist at UniCredit Research in London, wrote in a note to clients. “In this context an exchange auction aiming at decreasing 2014 bond redemptions is welcome news.”

The debt agency will buy bonds maturing in June 2014, October 2014 and October 2015 tomorrow, it said in a statement. The agency will sell 4.677 percent securities due in October 2017 and 4.956 percent notes maturing in June 2018.

Portugal’s two-year yield fell six basis points to 3.34 percent, while the five-year rate jumped 17 basis points to 4.97 percent.

The extra yield investors demand to hold the five-year notes over their two-year equivalents widened as much as 32 basis points to 163 basis points, the most since August.

Greek Bonds

Greek bonds advanced after Moody’s increased the nation’s credit rating by two steps on Nov. 29, citing progress in fiscal consolidation and an improving economic outlook.

The Greek 10-year yield declined four basis points to 8.74 percent after climbing to 8.89 percent on Nov. 28, the highest level since Oct. 14.

Global bond yields showed investors ignored 56 percent of Moody’s and 50 percent of S&P’s rating and outlook changes last year, more often disagreeing when the companies said that governments were becoming safer or more risky, data compiled by Bloomberg show.

The Netherlands sold 3 billion euros of three- and six-month bills after the nation was stripped of its top rating at Standard & Poor’s last week. The average yield on the 86-day security climbed to 0.04 percent from 0.015 percent at the previous auction on Nov. 18.

France sold a combined 6.4 billion euros of three-, six-and 12-month bills.

German bonds handed investors a loss of 1 percent this year through Nov. 29, the worst performer after the Netherlands among 15 euro-area debt markets tracked by Bloomberg World Bond Indexes. Spain’s rose 11 percent and Italy’s earned 7.5 percent.

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