German Bond Yields Rise Most in 3 Months Amid Rescue Optimism - BusinessWeek

October 01, 2011, 2:22 AM EDT

By Lucy Meakin and Lukanyo Mnyanda

Oct. 1 (Bloomberg) -- German benchmark government bonds posted the biggest weekly decline in three months as European officials stepped up their response to the region's debt crisis.

Bund yields climbed from near record lows as fourteen of the 17 euro nations approved expanded powers for the region's rescue fund, the European Financial Stability Facility, after increased pressure from global leaders and investors. Spanish and Italian bond yields slid even as the European Central Bank was said to scale back government bond purchases.

The rise in yields is partly "due to signs that the policy makers are making some progress," said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht. "There's still a long way to go but we are at least seeing some progress."

German 10-year yields climbed 14 basis points in the week to 1.89 percent at 5:06 p.m. in London yesterday. They dropped to a record low 1.636 percent on Sept. 23. Two-year rates rose 16 basis points to 0.55 percent.

The borrowing costs of Italy, Ireland, Spain, Portugal and Greece all declined in the week as the euro region's governments moved to boost the EFSF's firepower to curb the debt crisis. Policy makers "finally get it," Pacific Investment Management Co.'s Chief Executive Officer Mohamed A. El-Erian said in a Bloomberg Radio interview on Sept. 27.

Austria yesterday became the latest country to authorize the expanded powers for the fund. The countries yet to ratify the changes are Malta, the Netherlands and Slovakia.

'Silly Levels'

Italian 10-year yields slid nine basis points to 5.54 percent and the yield on Spanish debt of a similar maturity fell eight basis points to 5.13 percent. Portuguese 10-year yields plunged 86 basis points to 10.95, while the Greek yield dropped 97 basis points to 22.66 percent.

"We just say stay long bunds up until the point at which you think the periphery is fixed and we think the market's hopes will be disappointed on that, therefore you could get to some very silly levels in 10-year bunds," said Harvinder Sian, senior interest rate strategist at Royal Bank of Scotland Group Plc. "If the crisis gets much worse I can see bund yields below 1 percent."

European Central Bank policy makers meet on Oct 6. in a week that sees French, German and Spanish debt sales. Traders are betting the ECB will cut rates by 41 basis points over the next 12 months, a Credit Suisse Group AG index based on swaps shows.

--Editors: Matthew Brown, Daniel Tilles

To contact the reporters on this story: Lukanyo Mnyanda in Johannesburg at lmnyanda@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.