European Bonds Rise as China, G-20 Warnings Curb Scope for Yield

Most European government bonds advanced as speculation that China will grow more slowly and warnings from the world’s biggest economies of rising financial risks boosted demand for fixed-income assets.

Benchmark German 10-year yields dropped to the lowest level in almost two weeks as European Central Bank President Mario Draghi said risks to the euro-area recovery are clearly on the downside and that the ECB is prepared to add further stimulus if needed. China’s Finance Minister Lou Jiwei said Asia’s largest economy faces slower growth and Group-of-20 finance chiefs and central bankers said low interest rates may lead to a potential increase in financial-market risk.

“We have seen these Chinese comments, which brought risk-off sentiment in the market” supporting bonds, said Piet Lammens, head of research at KBC Bank NV in Brussels. “The market is looking for Draghi to do more and more.”

Germany’s 10-year yield fell two basis points, or 0.02 percentage points, to 1.02 percent at 4:38 p.m. London time, the lowest since Sept. 9. The 1 percent bond maturing August 2024 rose 0.225, or 2.25 euros per 1,000-euro ($1,284) face amount, to 99.825.

The 10-year bund yield will probably rise to 1.20 percent by year-end, partly reflecting increasing Treasury rates, KBC’s Lammens said.

China’s Lou said the government will not make major policy changes in response to economic indicators, after data last week showed foreign direct investment dropped to a four-year low and home prices fell in all but two cities tracked by authorities.

‘Excessive Risk’

Growth in the global economy is uneven, G-20 officials said yesterday in a communique released in Cairns, Australia. While the group said it welcomed “the stronger economic conditions in some key economies,” it pointed to risks. “We are mindful of the potential for a build-up of excessive risk in financial markets, particularly in an environment of low interest rates and low asset price volatility.”

European bonds were boosted last week when banks asked for just 83 billion euros in targeted ECB loans, compared with estimates from 100 billion euros to 300 billion euros in a Bloomberg survey of economists. That fueled speculation that further stimulus may be needed in the form of a quantitative-easing program, to prevent the region falling into a deflationary spiral.

Draghi Comments

“The risks surrounding the expected expansion are clearly on the downside,” Draghi said today in his quarterly testimony to European lawmakers in Brussels. “Recent indicators gave no indication that the sharp decline” in economic activity in the currency bloc has stopped, he said.

Officials are unanimous about embarking on further action if needed to stave off the threat of deflation in the region, Draghi said.

At the G-20 meeting, ECB Executive Board member Benoit Coeure told reporters that policy makers will take their time to assess the impact of stimulus measures announced in the past three months. The central bank may not need to add stimulus measures after steps in the past three months pushed down the euro, ECB council member Ignazio Visco said in an interview in Cairns.

After banks borrowed less than estimated during the ECB’s targeted-loan offer last week, the ECB’s target to expand its balance sheet “looks even more challenging,” Frederik Ducrozet and Orlando Green, analysts at Credit Agricole SA’s corporate and investment banking unit, wrote in a client note today. “With risks tilted toward a gradual increase in excess liquidity and inflation unlikely to rebound before October, the ECB will remain under pressure to do more.”

Draghi Commitment

Draghi has committed to increase the central bank’s balance sheet toward 3 trillion euros, the size reached at the height of the sovereign debt crisis in 2012.

Data this week is forecast to point to a slowdown in manufacturing and services in the euro area, according to Bloomberg surveys of economists. Purchasing managers’ indexes will be published by Markit Economics tomorrow, and Germany’s Ifo gauge of business confidence on Sept. 24 is predicted to fall to the lowest in more than a year.

France Affirmed

France’s 10-year bonds rose for a second day after the nation’s Aa1 credit rating was affirmed by Moody’s Investors Service on Sept. 19, which cited the size and wealth of the country’s economy even as it experiences a gradual erosion of strength.

The rating “reinforces the need to continue and deepen the structural reforms to lift the barriers that hinder France today,” Economy Minister Emmanuel Macron said in an e-mailed statement.

Investors have largely shrugged off credit-rating changes, reflecting a shift in focus to in-house analysis from reliance on ratings companies. Since France lost its AAA rating with Standard & Poor’s on Jan. 13, 2012, the yield on France’s benchmark 10-year government bond has dropped to about 1.36 percent from 3.04 percent.

French 10-year yields fell three basis points to 1.36 percent and those of the Netherlands dropped two basis points to 1.16 percent.

Volatility on Belgian bonds was the highest in the euro area today, followed by those of the United Kingdom and the Netherlands, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.

Euro-area government securities returned 9.8 percent this year through Sept. 19, Bloomberg World Bond Indexes show. Germany’s gained 6.6 percent and France’s earned 8 percent.

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