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 declined for the first day in five as France and Spain sold debt and stocks surged, limiting the appeal of the safest assets. Irish 10-year securities fell for an eighth day, the longest streak in two years, pushing the yield premium over bunds to a record amid concern the nation?s budget may not pass next month. Bunds stayed lower as the European Central Bank kept its key refinancing rate at a record low 1 percent today, as forecast by 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 four basis points to 2.56 percent at 12:50 p.m. in London. The 2.25 percent security maturing in September 2020 fell 0.37, or 3.7 euros per 1,000-euro ($1,423) face amount, to 98.19. The 30-year bund yield climbed nine basis points to 2.94 percent. The two-year note yield rose two basis points to 0.98 percent.
The 10-year bund yield rose four basis points to 2.26 percent after the ECB?s last meeting on Oct. 7. The Frankfurt- based central bank has held its main interest rate at 1 percent since May 2009.
French, Spanish Auctions
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.
Spanish Yields
The yield on Spanish 10-year bonds rose after the auction to 4.38 percent, up nine basis points from yesterday.
Norway?s sovereign-wealth fund, the world?s second-largest, said investing in Spanish debt has grown less attractive since the beginning of the third quarter after the southern European country?s bonds grew more expensive.
Though the oil fund held a more positive view on Spain?s debt at the beginning of last quarter, ?it is of course now a different situation than it was in July,? said Yngve Slyngstad, chief executive officer at Norges Bank Investment Management, a unit of the central bank that manages Norway?s $520 billion in oil funds, in an interview in Oslo today.
The Norwegian oil fund?s investment in Spanish bonds is ?more than it used to but it is still not at the benchmark rate, less than benchmark,? Slyngstad said today, referring to the portfolio against which the fund measures its investment allocations.
Slyngstad said his fund?s investments in Ireland are ?not large,? without elaborating.
Irish Budget
The Irish 10-year bond tumbled, sending the yield 25 basis points higher to 7.82 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 20 basis points to 522 basis points, according to Bloomberg generic data. That?s the most since Bloomberg began collecting the data in 1991.
Irish Swaps
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 widened 14 basis points to 857 basis points after earlier narrowing to 835 basis points.
The cost of insuring Irish debt rose. Credit-default swaps on Irish government debt rose 7 basis points to a record 567, according to data provider CMA.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase signals a deterioration in perceptions of credit quality.
Portuguese 10-year bonds yielded 408 basis points more than similar-maturity German paper, from 388 basis points yesterday.
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 debt has lost 16.5 percent, Irish securities lost 8.6 percent, while Portuguese lost 6.7 percent, 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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