German Bunds Rise Amid Fed Debt-Buying Speculation, Greek Talks

German Bunds Rise Amid Fed Debt-Buying Speculation, Greek Talks
January 26, 2012, 5:24 AM EST

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By Lucy Meakin

Jan. 26 (Bloomberg) — German 10-year bunds rose for a second day amid speculation the Federal Reserve is preparing to increase its bond purchases, adding to concern the global economy is struggling to recover.

Longer-maturity bunds led gains as Greece and its private creditors resume bond-swap talks in Athens while policy makers dispute the mounting cost of a rescue, boosting demand for the safest assets. Italy is scheduled to auction as much as 5 billion euros ($6.55 billion) of debt today.

Bunds “are getting a reasonably large boost from the U.S. market on the view of the Fed,” said Marc Ostwald, a fixed- income strategist at Monument Securities Ltd. in London. “It’s going to be a matter of focusing in on the auctions and what comes out of Greece.”

Germany’s 10-year yield fell one basis point, or 0.01 percentage point, to 1.93 percent at 9:42 a.m. London time. The 2 percent bund due in January 2022 rose 0.11, or 1.10 euros per 1,000-euro face amount, to 100.6. The yield climbed to 2.02 percent yesterday, the highest level since Dec. 21.

The U.S. central bank is considering additional bond purchases to boost growth, Fed Chairman Ben S. Bernanke said yesterday, as the Fed extended its pledge to keep interest rates low through at least late 2014.

A third, fourth and fifth round of easing “lie ahead,” Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, wrote in a Twitter post.

‘Out of Ammunition’

Central bankers in the developed world are “out of ammunition” and quantitative-easing policies in the U.S. aren’t achieving traction, Stephen Roach, non-executive chairman of Morgan Stanley Asia, said in an interview with Bloomberg Television at the World Economic Forum in Davos, Switzerland.

Bunds were also boosted amid concern Greece will default on its debt, increasing the challenges facing Europe’s policy makers as they struggle to resolve the region’s debt crisis.

Charles Dallara and Jean Lemierre, negotiating on behalf of private creditors, return to Athens today after European finance ministers insisted bondholders take bigger losses on their Greek debt. The International Monetary Fund suggested that public holders of Greek bonds might also have to increase support.

Greek two-year notes tumbled, with the price falling to 19.93 percent of face value and the yield climbing 22.15 percentage points to 193.92 percent.

Italian Bonds

Italian bonds advanced for the first time in three days as the nation prepared to sell its first inflation-linked securities of the year.

The 10-year yield fell eight basis points to 6.15 percent, narrowing the extra yield investors demand to hold the securities over similar-maturity bunds by six basis points to 422 basis points. Two year yields declined five basis points to 3.67 percent.

Italian borrowing costs have dropped at debt sales since the European Central Bank on Dec. 21 lent financial institutions a record 489 billion euros of three-year loans, in a so-called longer-term refinancing operation.

“We expect both auctions to be well received,” Giuseppe Maraffino, a strategist at Barclays Plc in London, wrote in an e-mailed note. “Short-dated issues have benefited over the past few weeks from the big take-up at the three-year LTRO held in December, with part of the liquidity probably used to buy bills and short-term bonds, especially in the peripheral countries.”

Bunds have handed investors a loss of 0.8 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French bonds have lost 0.2 percent and Greek debt rose 1.2 percent, the indexes show.

–Editors: Nicholas Reynolds

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

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

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