German 10-Year Bonds Advance, Pushing Yield to Lowest on Record
German 10-Year Bonds Advance, Pushing Yield to Lowest on Record
June 24 (Bloomberg) -- German 10-year government bonds rose, pushing yields to a record low, on speculation the European Central Bank will lower interest rates this year to help spur growth in the dozen economies using the euro.
German 10-year bonds, Europe's benchmark, are headed for the biggest weekly gain since Jan. 2004, after Sweden's Riksbank cut interest rates more than expected on June 21, and the Bank of England said two policy makers voted to lower U.K. borrowing costs. The French government pared its growth forecast and Italy said consumer confidence fell to a nine-month low in June.
``It's interest-rate expectations that are driving the market,'' said Jason Simpson, a bond strategist at ABN Amro Holding NV in London. ``It's hard to argue with the market at the moment, yields are continuing to fall.''
The yield on the German 10-year bund fell 2 basis points, or 0.02 percentage point, to 3.13 percent by 10:32 a.m. in London. It fell as low as 3.10 percent earlier today, the lowest since Bundesbank records began in 1973. The yield has dropped 15 basis points this week. Bond yields move inversely to prices.
The 3 1/4 percent bund due July 2015 rose 0.14, or 1.4 euros per 1,000-euro ($1,200) face amount, to 100.98, according to Merrill Lynch & Co.
``The fact two policy makers in the U.K. voted for a cut, and that Sweden cut is adding to calls the ECB should cut,'' said Joerg Warncke, who helps manage the equivalent of about $63 billion in bonds at Union Investment GmbH in Frankfurt.
Oil Prices
Demand for bonds was also buoyed on concern rising oil prices will slow economic growth, according to analysts such as Orlando Green, a fixed-income strategist in London at Calyon, the investment-banking unit of Credit Agricole SA.
Oil for August delivery touched $60 a barrel for a second day today on the New York Mercantile Exchange, the highest price for a contract closest to expiration since trading began on the exchange in 1983. Oil has risen 58 percent in a year and gained 21 percent in the past month.
Oil at $60 a barrel ``is going to be something that's going to have a positive effect on bonds on the growth concern,'' said Green, who predicts the yield on the 10-year bund may drop to 3 percent within ``the next couple of weeks.''
The yield on the 10-year benchmark bund has tumbled from a peak this year of 3.8 percent, reached March 10, as reports have shown sagging consumer confidence and contracting manufacturing.
Support for European bonds may be curbed as some investors judge gains for bonds reflect too much optimism that the central bank will cut its benchmark rate this year.
RBS Says Sell
Investors should sell two-year German government bonds because the Frankfurt-based ECB isn't yet prepared to lower its rate, according to Royal Bank of Scotland Group Plc, the U.K.'s second-largest bank by assets.
The yield on the two-year note, among the most sensitive to changes in interest rates, was at 2 percent today in London, and fell below the central bank's target interest two days ago.
ECB board member Jose Manuel Gonzalez-Paramo said yesterday the recovery in the $10 trillion euro region economy ``will be slower than expected, but it is under way''.
``For me, the move in the bond market is surprising, the market is expensive,'' said Louis Pestel, head of fixed-income in Paris at Lazard Freres Gestion, which manages about 3 billion euros in bonds. ``Our models suggest the yield is 60 to 70 basis points too low'' on the 10-year German bund.
Interest-Rate Futures
Interest-rate futures suggest traders are raising bets on the first rate cut in two years. The yield on the December Euribor interest-rate futures contract, which yesterday fell to 1.97 percent, is close to the lowest this year and below the ECB's 2 percent benchmark rate.
The contract settles to the three-month euro area inter-bank offered rate, which has averaged 15 basis points more than the ECB's rate since 1999.
In France the yield on the 3 1/2 government bond due April 2015 fell 3 basis points to 3.12 percent. The yield on the Italian 3 3/4 percent bond due August 2015 dropped 3 basis points to 3.32 percent.
German government bonds maturing in seven to 10 years have returned investors 5.6 percent this year, including reinvested interest, according to Merrill Lynch and Co. indexes.
To contact the reporter on this story: Steve Rothwell at srothwell@bloomberg.net.
Market Data 
Markets 
AI
