European Government Bonds Fall on Fed QE

European bonds fell, led by thirty- year securities, after the Federal Reserve announced it would buy $600 billion in Treasuries and focus its purchases on medium-term debt to stimulate the economy.

Irish bonds slid for an eighth day, the longest run in two years, as the government gave details of a budget that some investors are concerned may not pass. Portuguese and Greek debt followed, pushing yield spreads over bunds wider. The German 30- year bund fell for the first day in six as the European Central Bank kept its key interest rate at a record low, while investors absorbed new issues of French and Spanish debt as stocks surged.

“Bunds are suffering as the market scrutinizes details of the Fed, and there seems to be some supply indigestion,” said Michael Leister, a fixed-income analyst at WestLB AG in Dusseldorf, Germany. “The monthly pace of purchases is a bit slower than expectations. There’s some switching out of bunds into equities in the hope that the Fed will eventually get the job done to promote growth.”

The 30-year bund yield climbed six basis points to 2.90 percent at 4:45 p.m. in London. The 3.25 percent security maturing in July 2042 fell 1.13, or 11.3 euros per 1,000-euro ($1,421) face amount, to 107.12. The yield on the 10-year bund, Europe’s benchmark security, fell four basis points to 2.38 percent after reaching 2.51 percent earlier today.

The MSCI World Index of stocks jumped 2.2 percent, heading for its biggest daily gain since Sept. 1.

Speaking at a press conference in Frankfurt after the ECB policy meeting, President Jean-Claude Trichet said interest rates were “appropriate” and that inflation expectations were “firmly anchored.”

Debt Auctions

The yield on the bund rose four basis points to 2.26 percent after the ECB’s previous meeting on Oct. 7. The Frankfurt-based central bank has held its main interest rate at 1 percent since May 2009. Risks to the economic outlook are “tilted to the downside,” while risks to the inflation outlook are “tilted to the upside,” Trichet said today.

France sold about 8.85 billion euros of bonds maturing in 2020, 2023 and 2060, including 4.66 billion euros of 2.5 percent 2020 securities at an average yield of 2.87 percent. Investors bid for 1.87 times the amount on sale, up from a bid-to-cover ratio of 1.78 at the previous auction of the debt on Oct. 7.

“The French auctions looked quite well-received, given the total issuance size,” Leister said.

Spain auctioned 3.4 billion euros of five-year notes, less than the sale’s 4-billion-euro maximum target. The 2016 bonds, issued for the first time, yielded an average 3.576 percent, compared with 3.531 percent for bonds of similar maturity on the secondary market before the sale.

(source:bloomberg.com)