European bonds fell, led by thirty- year securities, after the Federal Reserve announced it would buy $600 billion in Treasuries and focus its purchases on medium-term debt to stimulate the economy.
Irish bonds slid for an eighth day, the longest run in two years, as the government gave details of a budget that some investors are concerned may not pass. Portuguese and Greek debt followed, pushing yield spreads over bunds wider. The German 30- year bund fell for the first day in six as the European Central Bank kept its key interest rate at a record low, while investors absorbed new issues of French and Spanish debt as stocks surged.
?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 30-year bund yield climbed six basis points to 2.90 percent at 4:45 p.m. in London. The 3.25 percent security maturing in July 2042 fell 1.13, or 11.3 euros per 1,000-euro ($1,421) face amount, to 107.12. The yield on the 10-year bund, Europe?s benchmark security, fell four basis points to 2.38 percent after reaching 2.51 percent earlier today.
The MSCI World Index of stocks jumped 2.2 percent, heading for its biggest daily gain since Sept. 1.
Speaking at a press conference in Frankfurt after the ECB policy meeting, President Jean-Claude Trichet said interest rates were ?appropriate? and that inflation expectations were ?firmly anchored.?
Debt Auctions
The yield on the bund rose four basis points to 2.26 percent after the ECB?s previous meeting on Oct. 7. The Frankfurt-based central bank has held its main interest rate at 1 percent since May 2009. Risks to the economic outlook are ?tilted to the downside,? while risks to the inflation outlook are ?tilted to the upside,? Trichet said today.
France sold about 8.85 billion euros of bonds maturing in 2020, 2023 and 2060, including 4.66 billion euros of 2.5 percent 2020 securities 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 debt 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 4.33 percent, up four 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 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 20 basis points higher to 7.77 percent.
Irish Finance Minister Brian Lenihan plans to slash the budget deficit by 6 billion euros in 2011 as he fights to save the nation?s economic independence. The budget shortfall will be reduced to between 9.25 percent and 9.5 percent of gross domestic product next year, the Finance Ministry in Dublin said in a statement today.
There?s a ?real risk? the government won?t be able to pass its budget, Goldman Sachs Group Inc. Chief European Economist Erik Nielsen said in a note yesterday. 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.
The difference in yield, or spread, between Irish bonds and benchmark German bunds rose as much as 25 basis points to 527 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 50 basis points to 894 after earlier narrowing to 835. The Portuguese-German yield gap increased 31 basis points to 418. The yield on the Portuguese 10-year security climbed to the highest since 1997, reaching 6.655 percent, according to Bloomberg generic data.
The cost of insuring Irish debt rose. Credit-default swaps on Irish government debt surged 30 basis points to a record 590, 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.
Bond Returns
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.
The extra yield investors demand to hold 10-year Treasuries instead of bunds may drop because the ECB is not likely to follow the Fed decision to extend its asset purchases, Lloyds TSB Corporate Markets said.
?The 10-year Treasury note-bund spread should get to parity and potentially beyond in the coming weeks,? Charles Diebel, head of market strategy in London, said in a telephone interview today.
French debt has returned 8.5 percent and Spanish bonds have gained 1 percent. Greek debt has lost 17 percent, Irish securities lost 8.6 percent, while Portuguese bonds 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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