Germany Leads Euro Bonds Lower as Appetite for Havens Diminishes

  • Rally in stocks, oil saps demand for safest government debt
  • Spanish debt underperforms euro peers before weekend elections

German bonds tumbled as a stock-market rally and rebound in oil from a seven-year low sapped demand for the securities as a haven, just as investors brace for a boost to U.S. interest rates.

The euro zone’s benchmark government securities extended their decline from Monday, when European Central Bank President Mario Draghi signaled that policy makers may be reluctant to immediately extend monetary stimulus, saying current measures will be enough to stoke inflation. The gains in riskier assets extended to junk bonds, following a rout that saw three high-yield funds halt redemptions. The rally further damped investor appetite for the safest sovereign securities.

Italy’s 10-year government debt yields climbed to a one-month high, while the extra yield, or spread, that investors get for holding similar-maturity Spanish debt instead of German bunds held near the widest in more than a week. The spread has increased ahead of Sunday’s elections, with polls showing Prime Minister Mariano Rajoy may lose his outright majority and need the support of rivals to get a second term.

“This has to do with the comeback of European stock markets, while oil prices stabilize around cycle lows,” said Mathias Van Der Jeugt, a fixed-income strategist at KBC Bank NV in Brussels. “Since the end of last week, there’s been some under-performance by Spain, and that merely has to do with the general elections.”

Two Days

Germany’s 10-year bund yield jumped seven basis points, or 0.07 percentage point, to 0.65 percent as of 4:35 p.m. London time, pushing its two-day advance to 11 basis points. The 1 percent security due in August 2025 slid 0.705, or 7.05 euros per 1,000-euro ($1,092) face amount, to 103.285.

Italy’s 10-year bond yield rose five basis points to 1.69 percent, after touching 1.72 percent, the highest since Nov. 11. The spread between similar-maturity Spanish and German debt narrowed four basis points to 1.12 percentage points, though that’s still up from 1.05 at the end of last month.

European bonds have trailed their U.S. counterparts since the ECB unveiled additional easing measures earlier this month that fell short of some investors’ expectations.

Euro-region government securities lost 0.9 percent from Dec. 2 -- the day before Draghi announced the extra stimulus -- through Monday, while U.S. Treasuries shed 0.2 percent, according to Bloomberg World Bond Indexes.

Losses in U.S. debt have been spurred by anticipation of the Federal Reserve’s first interest-rate increase in almost a decade. Policy makers in the world’s largest economy will raise their main rate from near zero at their meeting ending Wednesday, according to all but three of 102 economists surveyed by Bloomberg.

The European securities have gained 1.9 percent this year, compared with a 1.1 percent return on Treasuries.

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