Bunds near week's high as investors seek safety

Frankfurt: German government bonds held near the strongest level in more than a week as a decline in stocks and concern that European austerity measures will derail the economic recovery boosted demand for the safest assets.

Gains earlier pushed the yield on the 10-year bund to the lowest since May 7 as the MSCI World Index of stocks lost as much as 0.9 per cent. The extra yield investors demand to hold Greek bonds instead of bunds widened to the highest since officials agreed to a $1 trillion (Dh3.67 trillion) package for indebted nations a week ago. European Central Bank President Jean-Claude Trichet said the region needs a "quantum leap" in controls on national budgets.

Fear

"We're seeing the same old story in the bund market, with a flight to quality and everyone being scared of the Greece topic," said Glenn Marci, a fixed-income strategist in Frankfurt at DZ Bank, Germany's biggest cooperative lender. "It's just a story of fear."

The 10-year German bund yield rose 1 basis point to 2.86 per cent as of 8.30am in London, after earlier dropping to 2.82 per cent. The two-year note yield held at 0.57 per cent.

Investors demand an extra 514 basis points to hold 10-year Greek bonds instead of the bund, Europe's benchmark security, up from 485 basis points at the end of last week. The spread climbed to as much as 965 basis points on May 7.

Greek bonds were mixed, with the 10-year yield rising 6 basis points to 8.29 per cent, while that on the two-year security was 41 basis points lower at 7.72 per cent. Portugal's 10-year yield increased 8 basis points to 4.65 per cent.

The Greek crisis has pushed down bonds from other so-called peripheral European nations amid concern they may all struggle to meet debt obligations and fund their budget deficits.

"There is a need for a quantum leap in the governance of the euro area," Trichet said in an interview with German news weekly Der Spiegel. "There needs to be major improvements to prevent bad behaviour, to ensure effective implementation of the recommendations made by peers and ensure real and effective sanctions in the case of breaches."