Bond Selloff Abates Amid Signs Europe Infected by Economic Slump

  • German bond yields fall from week-high after debt sale
  • Irish bonds steady before nation's 15-year offering Thursday

A two-day selloff in European bonds abated as fresh evidence appeared that the region’s economic slowdown had gathered pace and would engulf its strongest economy. 

Spanish, Italian and Portuguese 10-year bonds slowed their declines as German peers erased a loss on Wednesday that earlier pushed yields on Europe’s benchmark securities to the highest in more than a week. Industrial production in Germany unexpectedly fell in August, while a similar gauge for Spain recorded the biggest drop in two years. Irish 15-year bonds climbed before an offering of the securities Thursday.

“We are going to have an economic context that is supportive” for bonds, said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. “The trend is still for lower yields toward the end of the year.”

End-Year Forecast

Germany’s 10-year yield was little changed at 0.59 percent as of 4:55 p.m. in London, after touching 0.63 percent, the highest since Sept. 28. The price of the 1 percent security due August 2025 was 103.905 percent of face value. Jacq sees 10-year bund yields falling back toward 0.4 percent by the end of December.

The Spanish 10-year yield was little changed, at 1.84 percent. So was Italy’s, hovering at 1.70 percent, and Portugal’s, at 2.36 percent. The yield on Ireland’s 15-year government securities fell three basis points, or 0.03 percentage point, to 1.70 percent, before the offering.

Since jumping to a 2015 high of 1.06 percent, Germany’s yield has dropped about 0.4 percentage point as signs of weakening growth in the region fueled speculation the European Central Bank will extend or expand its 60-billion-euro-a-month program to purchase assets that supports fixed-income investments.

German 10-year yields rose earlier on Wednesday as the government prepared to auction debt securities and as investors, mindful of a sharp selloff in the second quarter, questioned the sustainability of the rally in fixed-income amid a recovery in stock markets. The Stoxx Europe 600 index of shares held three days of gains.

Germany alloted 3.253 billion euros of 1 percent bonds maturing in 2025 at an average yield of 0.62 percent, the Bundesbank said. That’s short of the 4-billion euro target. The official bid-to-cover ratio, a gauge of demand, was 1.1 times, down from 1.2 in September.

“Yields have returned to about 0.6 percent, which highlights how reluctant investors are to hold bunds beyond certain yield levels,” UniCredit SpA analysts including Luca Cazzulani, a senior rates strategist in Milan, wrote in a client note before the sale.

(An earlier version of this story was corrected to show the Irish bond sale is set to take place on Thursday.)

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