German notes fall as business outlook improves

Berlin: German 10-year bonds fell for a second day after a report showed business confidence dropped less than economists forecast this month and stocks rose, sapping demand for safer investments.

Two-year notes erased gains that pushed yields to within three basis points of a record low. The Ifo institute said its business climate index declined to 107.5 from 108.7 in August, above the median forecast of 106.5 in a Bloomberg survey. Spanish and Italian bonds advanced as German Chancellor Angela Merkel said Eurozone leaders must erect a firewall around Greece to avert contagion to other euro area members. Greek notes declined.

"Part of it is in reaction to a firmer tone in equities, without a shadow of a doubt," said Marc Ostwald, a fixed-income strategist at Monument Securities in London. "The Ifo survey was not quite as negative as people expected. It acts as a bit of a check to the doom and gloom we've had."

The German 10-year yield increased four basis points to 1.79 per cent at 10:47am in London. The 2.5 per cent security due September 2021 fell 0.380, or €3.80 per €1,000 face amount to 104.170. Two-year yields climbed two basis points to 0.41 per cent, after falling to 0.35 per cent. They slid to a record low of 0.324 per cent on September 23.

The Stoxx Europe 600 Index rallied 1.9 per cent after earlier falling as much as 1.4 per cent. Futures on the Standard & Poor's 500 Index gained 0.9 per cent.

Core countries

Bonds in so-called core countries surged this quarter, with the German 10-year yield falling 122 basis points since June 30, as reports signalled the region's economy is slipping back into a recession and leaders remained divided over how to solve the debt crisis.

Most Greeks expect the country won't be able to avoid a default, according to two polls released in yesterday's editions of To Paron newspaper and Proto Thema.

Belgian 10-year bonds fell before the government sells securities maturing between 2016 and 2041. The 10-year yield increased four basis points to 3.80 per cent, leaving the extra yield investors demand to hold the securities instead of bunds at 200 basis points, from 197 basis points a week ago.