European government bonds fell as minutes of the Federal Reserve’s October policy meeting showed the central bank may taper its $85bn in monthly asset purchases “in coming months” if the US economy improves.
Bloomberg News reported that benchmark German bond yields climbed to the highest level in more than a week as a report showed manufacturing and services output in the euro area expanded for a fifth month in November.
Spanish and Italian bonds pared their declines amid speculation the European Central Bank, which this month cut its key interest rate, will add stimulus to support the recovery.
“The Fed was, of course, the big catalyst” for rising bund yields, said Jan von Gerich, a fixed-income strategist at Nordea Bank AB in Helsinki. “US yields will continue to move and European yields will follow, but not to the same extent because in Europe we have a central bank that’s clearly tilted toward further easing measures.”
Germany’s 10-year bond yield climbed three basis points, or 0.03 percentage point, to 1.74 per cent at 4:24 p.m. London time after rising to 1.78 per cent, the most since Nov. 13. The two per cent bond due in August 2023 fell 0.265, or €2.65 per €1,000 face amount, to 102.27.
US policy makers “generally expected that the data would prove consistent with the committee’s outlook for ongoing improvement in labour market conditions and would thus warrant trimming the pace of purchases in coming months,” according to the record of the Federal Open Market Committee’s Oct. 29-30 gathering, released on Wednesday in Washington. The FOMC next meets on Dec. 17-18.
Spain’s 10-year bond yield rose two basis points to 4.11 per cent after climbing to 4.16 per cent, the most since Nov. 7.
The rate on similar-maturity Italian debt increased one basis points to 4.10 percent.
Spain auctioned €3.5bn of notes due in 2017 at an average yield of 2.101 per cent on Thursday. The nation has covered 99.4 per cent of its planned issuance for this year, and may use funds raised at subsequent auctions this year to redeem some bills and lengthen its average debt maturity, the Spanish Economy Ministry said in an e-mailed statement.
The extra yield, or spread, investors demand to hold Spain’s 10-year bonds instead of five-year notes widened six basis points to 150 basis points, the most since Sept. 7, 2012.
ECB officials are weighing further tools to secure the economic recovery and reduce the risk of deflation after they cut the main refinancing rate to a record-low 0.25 per cent on Nov. 7.