German Bunds Slide With Italian Bonds as Stocks Rally on Growth

German government bonds fell, pushing 10-year yields to the highest in more than three months, as stock gains sapped demand for the safety of fixed-income assets amid speculation European growth will accelerate.

Italy’s bonds dropped as the nation’s borrowing costs increased at a sale of 2.6 billion euros ($3.58 billion) of zero-coupon securities. German 10-year bund yields are headed for their first annual increase since 2009 after the euro-area economy emerged from its longest recession on record. The Stoxx Europe 600 Index advanced for a sixth day.

“At the root of everything there is this idea that there is going to be better growth next year,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “When you look at Italy, there’s also technical-related movement which is basically responding to supply, on top of the normal argument that there’s expectations for better growth.”

Germany’s 10-year yield rose seven basis points, or 0.07 percentage point, from Dec. 23 to 1.96 percent at the 5 p.m. close of trading in London, the highest level since Sept. 23. The price of the 2 percent bond due August 2023 was 100.38. The yield has climbed from 1.32 percent at the end of 2012.

Bund yields will increase to 2.25 percent by the end of 2014, according to the median estimate of 16 economists and strategists in a Bloomberg News survey.

Easing Crisis

Demand for the safest fixed-income assets is waning after the euro area returned to growth in the three months through June, having contracted for the previous six quarters. The region’s economy will expand 1 percent next year and 1.4 percent in 2015, after shrinking by 0.4 percent this year, according to the median of analyst estimates compiled by Bloomberg.

German securities lost 1.8 percent this year, according to Bloomberg World Bond Indexes. Italy’s earned 7.1 percent and Spain’s returned 11 percent as the sovereign debt crisis that roiled the region since 2009 started to ease.

Italy sold zero-coupon securities due in December 2015 at an average yield of 1.346 percent, versus an average for 2013 before today’s sale of 1.586 percent. The rate climbed from 1.163 percent the last time the notes were sold on Nov. 26.

Italy’s 10-year yield rose four basis points from its close on Dec. 23 to 4.21 percent and touched 4.24 percent, the highest since Dec. 6. The rate has dropped from 4.50 percent on Dec. 31, 2012. The nation plans to sell as much as 5.5 billion euros of debt due in 2018 and 2024 on Dec. 30.

Spanish 10-year bond yields were little changed from Dec. 23 at 4.23 percent.

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

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