German Yields Rise to Two-Month High as Fed Slows Bond Purchases

Germany’s 10-year bond yields climbed to a two-month high after the Federal Reserve said this week it would reduce the pace of its asset purchases, damping demand for government debt.

Europe’s benchmark securities fell after data showed euro-area manufacturing expanded more in December than analysts forecast and consumer confidence in the region’s largest economy rose to the most in six years. Spanish and Italian bonds also declined. U.S. Treasuries dropped for a fifth straight week, the longest losing streak since June, as a report yesterday showed the U.S. economy expanded at a faster rate than previously estimated in the third quarter.

“Tapering is the biggest story,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “It definitely feels like euro-zone yields are also being dragged higher by U.S. data.”

Germany’s 10-year yield rose four basis points, or 0.04 percentage point, in the week to 1.87 percent as of 5 p.m. London time yesterday, after climbing to 1.91 percent, the highest since Oct. 17. The 2 percent bund due in August 2023 dropped 0.375, or 3.75 euros per 1,000-euro ($1,368) face amount, to 101.13.

The rate on 10-year bunds has surged 48 basis points since May 21, the day before Fed Chairman Ben S. Bernanke said the central bank could begin to reduce the monthly pace of bond purchases if it was confident of sustained gains in the economy.

Fed Tapers

The Fed said after a two-day policy meeting ended Dec. 18 it would cut its monthly purchases of Treasuries and mortgage-backed bonds to $75 billion from $85 billion starting in January. Commerce Department figures published yesterday showed U.S. gross domestic product climbed at a 4.1 percent annualized rate, the strongest since 2011 and up from a previous estimate of 3.6 percent.

Italian 10-year yields increased three basis points to 4.12 percent in the week, while similar-maturity Spanish yields rose four basis points to 4.14 percent.

A gauge of factory output in the 17-nation bloc, based on a survey of purchasing managers, rose to 52.7 from 51.6 in November, according to a Dec. 16 report, exceeding the median estimate in a Bloomberg survey for 51.9. A reading above 50 indicates expansion. Separate data yesterday from Nuremberg-based GfK SE showed a gauge of consumer confidence in Germany will climb to 7.6 in January, the highest reading since August 2007, from 7.4 this month.

German bonds lost 1.9 percent this year through Dec. 19, the worst performer of 15 euro-area debt markets tracked by Bloomberg World Bond Indexes. Spain’s returned 11 percent and Italy’s earned 7.7 percent.

France is scheduled to sell as much as 3.5 billion euros of 90- and 139-day debt on Dec. 23, while Italy will auction notes and bills on Dec. 27. European government bond markets will be closed on Dec. 24 and reopen Dec. 27.

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