Investors return to buy German bonds
Published 08/12/2011 | 05:00
INVESTORS have returned to buy German bonds ahead of the EU summit. The bonds rallied on the back of the strong demand for the eurozone's strongest member's debt as proposals to amend the EU treaty were being floated.
As investors sold off weaker periphery eurozone country bonds, German bunds rose in the latest bond auction.
The yield spread between 10-year German bonds and their Italian and Spanish counterparts expanded on speculation that European policymakers may fail to reach a lasting solution to the debt crisis this week.
Bunds also rose after investors flocked to a sale of five-year German debt, suggesting Berlin bonds remain safe and attractive and that a dismal auction two weeks ago was just a reflection of temporary market discontent with low yield levels.
Analysts said erratic moves in the market were a good indication of nervousness among investors in the lead-up to the summit, along with an expected interest rate cut by the European Central Bank today. "People are paring back their expectations for the summit. It used to be (the leaders) promised a lot and delivered little, now it's looking like nothing before it's even started," a trader in London said.
Ten-year Italian bond yields jumped to 6.1pc, hitting levels investors considered unsustainable over the longer term.
The move widened Italy's yield spread against German debt to as much as almost 0.5pc. Yields on 10-year Spanish paper rose to 5.5pc.
"This is a great example of the volatility in the bond market ahead of big events," said Mathias Van Der Jaugt, strategist at KBC in Brussels. "The market is jumping from one rumour to another."
He added: "In the peripheral bond market we had a rally since last Monday through yesterday, so the widening may also be driven by some profit taking after this big move." (Reuters)