Germany’s Bonds Beat Ireland’s Before Scots Vote on Independence

Germany’s government bonds outperformed their Irish counterparts as concern that Scotland may vote to break away from the U.K. boosted demand for the safest assets.

Benchmark bunds were underpinned by an industry report showing German investor confidence dropped for a ninth consecutive month in September even as the European Central Bank steps up stimulus. Most euro-area bonds were little changed with the Federal Reserve due to start a two-day policy meeting today amid speculation officials will signal they are closer to increasing U.S. interest rates.

“There is a lot of uncertainty in the near term and that reduces investors’ risk appetite,” said Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA in Milan, which oversees the equivalent of $15.6 billion. Scotland’s referendum “is a key event, as a ‘yes’ vote can potentially change the European political landscape. Bunds outperformed because it’s the only hedge worth having.”

Germany’s 10-year yield was little changed at 1.06 percent at the 5 p.m. London close after falling as low as 1.03 percent intraday. The rate climbed to 1.10 percent on Sept. 12, the highest since Aug. 7. The price of the 1 percent bund due in August 2024 was at 99.43.

Scotland Votes

Scotland holds its referendum on Sept. 18 to decide whether to become an independent country after 307 years as part of the U.K.

A “yes” vote could spark a trend that spreads like “wildfire” as it may increase calls for independence in regions of Belgium, Italy and Spain, according to Andreas Utermann, who helps oversee $483 billion as chief investment officer for Allianz Global Investors.

“We don’t need this sort of distraction in Europe,” Utermann said in an interview on Bloomberg Television’s “On The Move” with Jonathan Ferro. “And frankly, if it’s a ‘yes’ vote in Scotland, which I hope it won’t, the risks of the rest of the U.K. leaving the European Union are increased and that again is not positive for European assets.”

Volatility on French bonds was the highest in the euro area today, 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.

Ireland’s 10-year yield rose two basis points, or 0.02 percentage point, to 1.90 percent, widening the yield gap to German bunds to 84 basis points. France’s 10-year yield rose one basis point to 1.44 percent.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, fell to 6.9 this month from 8.6 in August. The gauge has decreased every month since December, when it reached a seven-year high.

Policy Divergence

German securities have outperformed U.S. Treasuries this month amid speculation central-bank monetary policy will diverge further as the Fed moves closer to an interest-rate increase. The ECB is about to provide additional stimulus through targeted longer-term refinancing operations to fend off deflation.

The yield difference, or spread, between U.S. 10-year notes and similar-maturity German bunds was at 151 basis points today. That’s about two basis points from a 15-year high reached on Sept. 5, based on closing levels.

The Fed is reducing the bond purchases it has used to support the economy and is on track to end them this year. Policy makers have kept the target for the benchmark interest rate in a range of zero to 0.25 percent since December 2008.

German government securities returned 6.5 percent this year through yesterday, Bloomberg World Bond Indexes show. Ireland’s earned 11 percent, and France’s 7.9 percent. Treasuries gained 3.3 percent.

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