German Yields Rise to 3-Month High on Improving Economic Outlook

German 10-year government bonds fell for a second week, with yields rising to the highest in more than three months, as signs of faster European growth sapped demand for the region’s safest assets.

Irish bond yields narrowed to the least relative to benchmark German bunds in more than 3 1/2 years. Italy’s securities fell before the nation sells as much as 5.5 billion euros ($7.6 billion) of 2018 and 2024 debt on Dec. 30. A report next week will probably confirm that euro-area factory output grew at the fastest pace in more than two years in December.

“It’s a combination of hunt for yield, and then it’s the small strengthening of economies in southern Europe” that’s motivating investors to switch from the safest bond markets, said Soeren Moerch, head of fixed-income trading at Danske Bank A/S in Copenhagen. “We will see more spread tightening, with people leaving some of the core and going into the periphery.”

Germany’s 10-year yield rose nine basis points, or 0.09 percentage point, this week to 1.96 percent as of 5 p.m. London time yesterday, the highest close since Sept. 18. The rate is up from 1.32 percent on Dec. 31, 2012, and is set for the first annual gain since 2009. The price of the 2 percent security maturing in August 2023 fell 0.75, or 7.50 euros per 1,000-euro face amount, to 100.38.

Demand for the safest fixed-income assets is waning this year as the 17-nation euro area economy return to growth and the regin’s sovereign debt crisis abates. The economy will expand 1 percent next year and 1.4 percent in 2015, after shrinking by 0.4 percent this year, according to economists’ predictions compiled by Bloomberg.

Irish Yields

Bunds also declined with Treasuries. U.S. 10-year yields climbed to the highest since 2011 yesterday amid bets that a quickening U.S. recovery will prompt the Federal Reserve to keep cutting asset purchases.

Ireland’s 10-year bond yield rose three basis points in the week to 3.46 percent, and the additional yield investors demand to hold the securities instead of benchmark German bunds narrowed to 150 basis points, the tightest spread on a closing-market basis since April 2010.

An index based on a survey of purchasing managers in the manufacturing industry increased to 52.7, a 31-month high, from 51.6 in November, London-based Markit Economics will say on Jan. 2, confirming a Dec. 16 initial release, according to the median estimate of 23 economists in a Bloomberg News survey.

Italy’s 10-year yield was at 4.21 percent yesterday, from 4.12 percent on Dec. 20. The rate has dropped from 4.50 percent on Dec. 31.

Germany’s bonds lost 1.8 percent this year, according to Bloomberg World Bond Indexes. Italy’s securities earned 7.1 percent and Spain’s returned 11 percent.

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