Frankfurt: German 10-year bonds posted their third weekly gain as investors sought the safest assets on concern the fallout from Europe's sovereign-debt crisis will derail the region's recovery.
Bond yields in France, Germany and Belgium fell to record lows while Irish borrowing costs rose at an auction of bills. A report two days ago showed the Greek economy shrank for a seventh quarter, sending the yield premium investors demand to hold the country's 10-year bonds rather than bunds to the highest since the European Union announced a 750 billion euro ($957 billion) package for the region's most indebted nations.
"There're a lot of artificial premiums in German bonds from the safe-haven flows from the markets like Greece, Spain or Ireland," said Robin Marshall, a director of fixed income at Smith & Williamson Investment Management in London. "With problems in those countries, growth is likely to be softer going forward."
The yield on 10-year German bonds fell 12 basis points from last week to 2.39 per cent as of Friday, after earlier reaching a record low of 2.37 per cent. Greek 10-year bonds yields climbed 30 basis points to 10.55 per cent.
Bunds rose even as a report showed Germany's economy grew in the second quarter at the fastest pace since the country's reunification two decades ago. German gross domestic product surged 2.2 per cent from the first quarter, fueling euro-area growth of one per cent, the fastest in four years.
Economists had forecast GDP would rise 1.3 per cent in Germany and 0.7 per cent in the entire currency region. Spain's GDP increased 0.2 per cent from the previous quarter.
Bunds may extend gains
"While the German growth data for the second quarter has rebounded impressively, the picture at the periphery of Europe is very different with the GDP data from Greece, Spain, Portugal and Italy coming in sluggish at best, and in the case of Greece very disappointing," foreign-exchange analysts at BNP Paribas led by Hans-Guenter Redeker in London wrote in a research note yesterday.
Concern the recovery from the worst recession since World War II will be uneven has helped drive demand for the safest securities this year.
Spanish bonds returned 1.5 per cent this year and Irish debt 0.5 per cent, compared with an 8 per cent gain from German securities, according to indexes compiled by European Federation of Financial Analysts Societies.
Yields indicate the region's debt crisis has further to run. Catalonia, which accounts for a fifth of Spanish gross domestic product, has been shut out of public bond markets since March and the extra yield it pays over national government debt has almost tripled this year.
