German Bonds Advance as Investors Mull ECB Loans, Scotland Vote

German government bonds rose, pushing 10-year yields down from near a five-week high, as investors weighed the market impact of the European Central Bank’s new loans stimulus program due to start this week.

The ECB will allot the first funds under its targeted longer-term refinancing operations, or TLTROs, on Sept. 18, part of measures to boost the region’s economy. Bunds advanced along with Treasuries as data showed U.S. industrial production unexpectedly declined in August. Austrian and Dutch securities rose before the Federal Reserve’s open market committee begins a two-day policy meeting tomorrow and Scotland holds a vote on independence this week.

“After the selloff last week, some real money is going back to benchmark and buying bunds ahead of the FOMC, the TLTRO and the Scotland vote,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S in Copenhagen.

Germany’s 10-year yield dropped two basis points, or 0.02 percentage point, to 1.07 percent as of 4:18 p.m. London time. The rate climbed to 1.10 percent on Sept. 12, the highest since Aug. 7. The 1 percent bond due August 2024 rose 0.155, or 1.55 euros per 1,000-euro ($1,295) face amount, to 99.385.

The ECB’s effort to revive the stagnating euro-area economy and fend off deflation has included cutting interest rates to record lows and expanding unconventional policy. Draghi said earlier this month he wants to boost the central bank’s assets to the level seen at the start of 2012, an increase of as much as 1 trillion euros from current levels. The market is watching to see whether he’ll take the controversial step of large-scale quantitative easing to get there.

New Stimulus

Standard & Poor’s said the new stimulus, which include TLTROs and buying of asset-backed securities, could lift growth in the medium term, and will pave the way for QE.

“In our view, the vulnerability of the recovery in the euro zone, the elevated risks of a triple dip, and the threat of negative inflation would justify the recourse to additional non-conventional measures,” S&P chief European economist Jean-Michel Six wrote in a report published today.

Fitch Ratings is less sanguine about the program, which it said is unlikely to kick-start bank lending in southern Europe, although initial take-up of the funds may be high.

“Overall bank appetite to lend, and demand for credit, may remain subdued regardless of the monetary conditions given the weak growth, corporate leverage which is still high,” Fitch wrote in a report today.

Output Falls

German bunds extended gains as Fed data showed output at U.S. factories, mines and utilities fell 0.1 percent last month after a 0.2 percent gain in July that was smaller than previously reported. The median forecast in a Bloomberg survey of economists called for a 0.3 percent increase.

Treasury 10-year rates declined two basis points to 2.60 percent. Austria’s 10-year yield dropped one basis point to 1.27 percent and similar-maturity Dutch rates fell one basis point to 1.23 percent.

There’s about a 76 percent chance the Fed will raise its target for overnight lending between banks from a range of zero to 0.25 percent by its September 2015 meeting, fed funds future data compiled by Bloomberg showed today. The probability was about 70 percent a month ago.

Scotland will hold a referendum on independence on Sept. 18 as recent surveys show the vote to be on a knife-edge. Four polls were released over the weekend, three of which showed the “no” campaign ahead. The fourth, a survey by ICM Research for the Sunday Telegraph, put “yes” in front by the greatest-ever margin.

Market ‘Volatility’

“There is still volatility in the market due to” the Scotland referendum, Daniel Lenz, lead market strategist for the euro area at DZ Bank AG in Frankfurt. “The latest polls have shown a higher likelihood that no camp will succeed but still it’s too close to call and countries like Spain could get new tailwinds.”

Spain’s 10-year yields were little changed at 2.35 percent after rising 30 basis points last week as the Catalan region’s own push for independence garnered attention.

Ireland’s bonds fell for a fifth day as the government considers repaying loans from the International Monetary Fund early, a move that may lead to an increase in debt sales.

Irish 10-year yields rose two basis points to 1.88 percent, having dropped to 1.594 percent on Sept. 8, the lowest since Bloomberg began collecting the data in 1991.

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