German Bonds Gain as Selloff Seen Excessive With Stimulus Intact

German government bonds rose amid speculation that yesterday’s selloff was excessive given the prospect of central banks around the world maintaining stimulus.

The benchmark 10-year yield dropped below 1 percent as a report showed U.K. inflation cooled in July. Economic growth in the euro area has ground to a halt while inflation is at the weakest pace in almost five years, reports showed last week. The bund yield climbed the most since May yesterday as tensions in Ukraine eased. Portuguese bonds advanced for an eighth day as Fitch Ratings said a ruling by the nation’s constitutional court partially approving expenditure measures was fiscally positive.

“It’s a very reasonable move given what we have seen in the days before,” said Daniel Lenz, lead market strategist for the euro area at DZ Bank AG in Frankfurt. “It seems like the market is trying to find fair value, which for bunds seems to be around 1 percent. All the euro-region sovereigns look to be strongly correlated as they are moving in the same direction.”

German 10-year yields fell two basis points, or 0.02 percentage point, to 1 percent at 4:17 p.m. London time after climbing six basis points yesterday, the most since May 21. The rate dropped to a record 0.951 percent on Aug. 15. The 1.5 percent bund due in May 2024 rose 0.14, or 1.40 euros per 1,000-euro ($1,332) face amount, to 104.62.

Spain’s 10-year yield dropped three basis points to 2.43 percent, having climbed five basis points yesterday. The rate on equivalent Italian bonds fell four basis points to 2.59 percent.

Portugal Ruling

Portugal’s Constitutional Court Judge Joao Pedro Caupers told reporters on Aug. 14 that measures reducing state workers’ pay in 2014 and 2015 are constitutional. The ruling “reduces a key near-term risk to consolidation and keeps the sovereign on track to hit its fiscal targets this year,” Fitch wrote in a report today.

“The Portuguese government looks likely to announce further budget-deficit reduction measures,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “This is good news for Portuguese bonds.”

Portugal’s 10-year bond yield declined nine basis points to 3.40 percent and touched 3.38 percent, the lowest level since June 16.

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

German securities returned 6.5 percent this year through yesterday, Bloomberg World Bond Indexes show. Spain’s earned 12 percent, Italy’s 11 percent and Portugal’s gained 17 percent.

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