European investors European Bonds Drop as Stock-Market Rally Boosts Risk Appetite

German 10-year government bonds fell, paring the biggest weekly advance this year, as a rebound in stocks eroded demand for the safety of fixed-income securities.
The difference in yield between the bund and the two-year German note was near the narrowest in two weeks as investors reduced holdings of the safest assets. Bonds dropped even as a report showed the euro-area economy shrank in the fourth quarter by the most in at least 13 years, making it more likely the European Central Bank will cut the refinancing rate next month.

“We’ve had a recovery in equities overnight and investors are selling bonds a bit,” said Luca Cazzulani, a fixed-income strategist in Milan at Unicredit Markets & Investment Banking, a unit of Italy’s largest lender. “There has already been a sharp rally this week and the data wasn’t really a surprise.”

The yield on the bund, Europe’s benchmark government security, rose four basis points to 3.12 percent by 10:17 a.m. in London, leaving it 25 basis points lower this week. That would be the biggest weekly yield decline since Dec. 19. The 3.75 percent security due January 2019 fell 0.37, or 3.7 euros per 1,000-euro ($1,289) face amount, to 105.24.
The yield on the two-year note climbed two basis points to 1.32 percent, near the lowest level since at least 1990. Bond yields move inversely to prices.
European stocks tracked gains in Asian markets amid optimism governments will expand efforts to revive the global economy and rescue banks. The Dow Jones Stoxx 50 Index, a benchmark for the euro region, added 1.8 percent.

Deepening Recession
Bonds gained this week amid signs the first recession since the European currency’s debut a decade ago is deepening, putting pressure on policy makers to cut interest rates. ECB Vice President Lucas Papademos said this week the central bank may lower rates to a record in March and consider other measures to stimulate growth. The ECB trimmed the main refinancing rate 50 basis points to 2 percent last month.
Gross domestic product in the region fell 1.5 percent from the previous quarter, the European Union’s statistics office said. That compares with the 1.3 percent decline forecast by economists in a Bloomberg survey. GDP declined 2.1 percent in Germany and 1.2 percent in France, the two national statistics offices said today.
“Persistent uncertainty and risk aversion should continue to generate relatively stronger demand for longer maturities,” fixed-income strategists at WestLB wrote in a client note today.
Countries around the world are scrambling to put together aid packages to prop up the international financial system after a crisis that resulted in more than $1 trillion in credit-market related losses.

‘Temporary Obstacle’
Italy sold 7.3 billion euros of securities maturing between 2013 and 2029 today. The auction included 3.4 billion euros of bonds due 2013, which yielded an average 3.75 percent, 154 basis points more than the equivalent German five-year note.
“Supply is a temporary obstacle” to lower yields, Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets, a securities broker for banks and institutional investors. “The fundamental backdrop remains positive.”
German bonds earned investors 0.4 percent this year, compared with a loss of 1.5 percent for gilts and a drop of 2.2 percent for Treasuries, according to Merrill Lynch & Co.’s German Federal Governments, U.K. Gilts and U.S. Treasury Master indexes. German bonds returned 12 percent last year.

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