German Bonds Fall After Fed Decision; France, Spain to Auction Securities - Bloomberg

German bunds weakened after the Federal Reserve announced it would buy $600 billion in Treasuries at a slower pace than some analysts anticipated.

Thirty-year bunds led the drop as the Fed said it will focus purchases on medium-term debt to reinforce the economy. The 10-year bund fell for the first day in five as France and Spain sold debt and stock markets surged, limiting the appeal of the safest assets. Irish 10-year securities declined for an eighth day, the longest stretch in almost two years, pushing the yield premium over bunds to a record amid concern the nation’s budget may not pass next month. The European Central Bank will leave its main refinancing rate at a record low 1 percent today, according to all 55 economists in a Bloomberg News survey.

“Bunds are suffering as the market scrutinizes details of the Fed, and there seems to be some supply indigestion,” said Michael Leister, a fixed-income analyst at WestLB AG in Dusseldorf, Germany. “The monthly pace of purchases is a bit slower than expectations. There’s some switching out of bunds into equities in the hope that the Fed will eventually get the job done to promote growth.”

The yield on the 10-year bund, Europe’s benchmark security, gained eight basis points to 2.50 percent at 10:46 a.m. in London. The 2.25 percent security maturing in September 2020 fell 0.69, or 6.9 euros per 1,000-euro ($1,423) face amount, to 98.15. The 30-year bund yield climbed 13 basis points to 2.97 percent. The two-year note yield rose two basis points to 0.98 percent.

French, Spanish Auctions

The Stoxx 600 index of European equities rose 1.2 percent, reaching a six-month high.

France sold 8.85 billion euros ($12.6 billion) of bonds maturing in 2020, 2023 and 2060, including 4.66 billion euros of 2.5 percent 2020 bonds at an average yield of 2.87 percent. Investors bid for 1.87 times the amount on sale, up from a bid- to-cover ratio of 1.78 at the previous auction of the same securities on Oct. 7.

“The French auctions looked quite well-received, given the total issuance size,” Leister said.

Spain auctioned 3.4 billion euros of five-year notes, less than the sale’s 4-billion-euro maximum target. The 2016 bonds, issued for the first time, yielded an average 3.576 percent, compared with 3.531 percent for bonds of similar maturity on the secondary market before the sale.

The yield on Spanish 10-year bonds rose after the auction to 4.34 percent, up six basis points from yesterday.

Irish Budget

The Irish 10-year bond tumbled, sending the yield 17 basis points higher to 7.73 percent. The nation faces a “messy” four weeks as the government prepares its 2011 budget and tries to reassure investors, Goldman Sachs Group Inc. Chief European Economist Erik Nielsen said in a note late-yesterday.

There’s a “real risk” the government won’t be able to pass the budget, Nielsen said. Ireland is still “fully funded through mid-2011, so we are not talking about an imminent liquidity crisis,” he wrote.

The Irish government last month said it needs 15 billion euros of savings over the next four years to reduce the deficit. It will announce its 2011 target this week.

The nation will still have a “very substantial” borrowing requirement next year, John Curran, a government spokesman, said in an interview with Dublin-based broadcaster RTE today.

The difference in yield, or spread, between Irish bonds and benchmark German bunds rose as much as 14 basis points to 516 basis points, according to Bloomberg generic data. That’s the most since Bloomberg began collecting the data in 1991.

That compares with the record 973 basis-point premium on Greek 10-year debt, reached May 7, before the European Union crafted a rescue package worth 750 billion euros. The Greek- German spread fell six basis points to 838 basis points, the first time the gap has narrowed since Oct. 18.

German bonds have returned 8.7 percent this year, compared with an 8.9 percent gain for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

French debt has returned 8.5 percent and Spanish bonds have gained 1 percent. Greek and Irish debt have lost 16.5 percent and 8.6 percent respectively, the indexes show.

To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net

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

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