German Yields Climb Most Since 2006 as Euro Area Exits Recession

German government bonds slumped last year, with 10-year yields rising the most since 2006, as the euro area’s emergence from its longest recession on record damped demand for the region’s safest assets.

Two-year notes dropped for the first time since 2007, with the rate rising from less than zero, as the threat of the 17-nation currency bloc splintering diminished. The economies of the countries that share the euro will expand 1 percent in 2014 and 1.4 percent in 2015, after contracting 0.4 percent in 2013, according to Bloomberg surveys of analysts. Bunds fell along with Treasuries as the Federal Reserve said it would reduce its $85 billion in monthly asset purchases.

“We’re optimistic the euro region is on slightly firmer ground,” said John Wraith, fixed-income strategist at Bank of America Corp. in London. “Yields have risen for positive reasons, not negative ones. It’s about improving growth expectations and a diminished bid for core sovereign bonds.”

The yield on German 10-year bunds climbed 61 basis points, or 0.61 percentage point, this year to 1.93 percent at the close of trading on Dec. 30. That’s the biggest increase since 2006, when yields jumped 64 basis points. The 10-year yield reached 2.09 percent in September, the highest since December 2011. The two-year rate rose 23 basis points to 0.21 percent, after being as low as minus 0.045 percent in May.

Demand Wanes

Demand for German securities, perceived to be among the euro area’s least risky assets, waned as Europe’s debt crisis stabilized after European Central Bank President Mario Draghi pledged in July 2012 to preserve the currency union. Yields rose as the U.S. recovery gained momentum, prompting the Fed to say Dec. 18 that it would cut its monthly bond purchases by $10 billion starting this month.

Draghi’s pledge helped buoy demand for the euro region’s higher-yielding government debt. The extra yield on Italian 10-year bonds over similar-maturity German bunds shrank to as little as 215 basis points on Dec. 30, the least since July 2011. That’s down from a euro-era high of 575 basis points set in November 2011.

The yield spread between Spanish 10-year securities and German bunds narrowed to 217 basis points on Dec. 11, the least since June 2011.

Benchmark German 10-year yields increased this year even as the ECB twice cut its main interest rate, to an all-time low of 0.25 percent.

“Our monetary-policy stance will remain accommodative for as long as necessary,” Draghi told reporters in Frankfurt on Nov. 7 after the most recent reduction.

Yield Forecasts

Bund yields will climb to 2.25 percent by the end of 2014, Bank of America’s Wraith said. That’s in line with the median estimate in a Bloomberg News survey of economists and strategists. Forecasts range from 1.90 percent to 2.80 percent.

“We see bund yields going higher this year, but lagging the U.S.,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “With very aggressive easing by the ECB and poor data we could test November lows, but not 2013’s.”

Benchmark German 10-year yields fell to 1.66 percent on Nov. 1, before the ECB lowered its refinancing rate.

Treasury 10-year yields climbed to 3.02 percent on Dec. 27, the highest since July 2011, and up from 1.76 percent at the end of 2012.

German bonds lost 2.1 percent in the year through Dec. 30, the worst performer of 15 euro-area debt markets tracked by Bloomberg World Bond Indexes. Italian securities earned 7.6 percent and Spain’s returned 11 percent, while Treasuries fell 3.2 percent, the indexes show.

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