ECONOMY

European bonds rise as China, G-20 warnings curb scope for yield

Most European government bonds advanced as speculation China will accept lower growth and warnings from the world’s biggest economies of rising financial risks boosted demand for fixed-income assets.

Benchmark German 10-year yields dropped to the lowest level in almost two weeks before European Central Bank President Mario Draghi is scheduled to testify in the European Parliament in Brussels today. China’s Finance Minister Lou Jiwei said Asia’s largest economy faces slower growth and Group-of-20 finance chiefs and central bankers said low interest rates may lead to a potential increase in financial-market risk.

“We have seen these Chinese comments, which brought risk- off sentiment in the market” supporting bonds, said Piet Lammens, head of research at KBC Bank NV in Brussels. “The market is looking for Draghi to do more and more. Today he probably will sound dovish but he will also maybe push away expectations of the ECB always coming in with new initiatives before you even see the impact of what has been decided in the past.”

Germany’s 10-year yield fell one basis point, or 0.01 percentage point, to 1.03 percent at 12:01 p.m. London time after declining to 1.02 percent, the lowest level since Sept. 9. The 1 percent bond maturing August 2024 rose 0.105, or 1.05 euro per 1,000-euro ($1,284) face amount, to 99.705.

The 10-year bund yield will probably rise to 1.20 percent by year-end, partly reflecting increasing Treasury rates, KBC’s Lammens said.

Policy Change

China’s Lou said the government will not make major policy changes in response to economic indicators, after data last week showed foreign direct investment dropped to a four-year low and home prices fell in all but two cities tracked by authorities.

“We are mindful of the potential for a build-up of excessive risk in financial markets, particularly in an environment of low interest rates and low asset price volatility,” the G-20 officials said yesterday in a communique released in Cairns, Australia. “We welcome the stronger economic conditions in some key economies, although growth in the global economy is uneven.”

Draghi will deliver his quarterly testimony to European lawmakers and answer questions starting at 3 p.m. in Brussels today. European bonds were boosted last week when banks asked for just 83 billion euros in targeted ECB loans, compared with estimates from 100 billion euros to 300 billion euros in a Bloomberg survey of economists. That fueled speculation that further stimulus may be needed in the form of a quantitative- easing program, to prevent the region falling into a deflationary spiral.

Slowdown Forecast

At the G-20 meeting, ECB Executive Board member Benoit Coeure told reporters that policy makers will take their time to assess the impact of stimulus measures announced in the past three months. The central bank may not need to add stimulus measures after steps in the past three months pushed down the euro, ECB council member Ignazio Visco said in an interview in Cairns.

Data this week is forecast to point to a slowdown in manufacturing and services in the euro area, according to Bloomberg surveys of economists. Purchasing managers’ indexes will be published by Markit Economics tomorrow, and Germany’s Ifo gauge of business confidence on Sept. 24 is predicted to fall to the lowest in more than a year.

France Affirmed

France’s 10-year bonds rose for a second day after the nation’s Aa1 credit rating was affirmed by Moody’s Investors Service on Sept. 19, which cited the size and wealth of the country’s economy even as it experiences a gradual erosion of strength.

The rating “reinforces the need to continue and deepen the structural reforms to lift the barriers that hinder France today,” Economy Minister Emmanuel Macron said in an e-mailed statement.

Investors have largely shrugged off credit rating changes, reflecting a shift to a focus on in-house analysis from reliance on ratings companies.

French 10-year yields fell three basis points to 1.36 percent and those of the Netherlands dropped two basis points to 1.16 percent.

Volatility on Dutch bonds was the highest in the euro area today, followed by those of Austria and France, according to measures of 10-year debt, the yield spread between two- and 10- year securities and credit-default swaps.

European government securities returned 9.8 percent this year through Sept. 19, Bloomberg World Bond Indexes show. Germany’s gained 6.6 percent and France’s earned 8 percent.

[Bloomberg]