European Bonds Post Biggest Weekly Loss Since 2001 on U.S. Plan

By Anchalee Worrachate

Dec. 13 (Bloomberg) -- European government bonds posted the biggest weekly decline in seven years on speculation the U.S. government will produce a public-spending package and bailout for automakers, preventing the country from sinking deeper into a recession.

Bonds dropped yesterday as the Treasury said it’s ready to provide financing to car producers after the Senate failed to approve a rescue plan a day earlier. President-elect Barack Obama said Dec. 8 his government will invest the most in the nation’s infrastructure since President Dwight D. Eisenhower created the interstate highway system 50 years ago.

“These pledges appear to reduce some of the downside risks to the economy, and are therefore bond negative,” said Harvinder Sian, a senior bond strategist at Royal Bank of Scotland Group Plc in London. “But their impact on bonds could be short-lived. You have economic data and an inflation outlook that are increasingly bond bullish. It’s inevitable yields will come crashing in at some point in the first quarter.”

The yield on the 10-year bund rose 26 basis points from last week to 3.29 percent, the most since the week ended Dec. 7, 2001. The 3.75 percent note due January 2019 fell 0.71, or 7.1 euros per 1,000-euro ($1,334) face amount, to 103.84.

The yield on the two-year note advanced 20 basis points from last week, the most since the five days ending June 6. Yields move inversely to prices.

Bond Returns

German bonds returned 10.4 percent this year, compared with 8.3 percent for gilts and 12.2 percent for U.S. Treasuries, according to Merrill Lynch & Co.’s German Federal Government, U.K. Gilts and U.S. Treasury Master indexes. By comparison, the Dow Jones Stoxx 600 Index slid 46 percent and Germany’s DAX Index lost 42 percent. Crude oil fell 51 percent and gold 1.8 percent.

“Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry,” Treasury spokeswoman Brookly McLaughlin said in a statement yesterday.

The Treasury committed all but about $15 billion of the first half of the Troubled Asset Relief Program’s funds since the plan was enacted Oct. 3. Treasury Secretary Henry Paulson has resisted calls to use the program to aid the automakers.

Bonds also slipped as European Central Bank council member Axel Weber cautioned against cutting the region’s key interest rate below 2 percent.

A week after reducing the rate by 75 basis points, the biggest cut in the ECB’s history, officials are displaying little appetite to follow the Federal Reserve and other central banks in continuing to ease monetary policy. The ECB pared its key rate by 175 basis points since early October to 2.5 percent.

“We should be cautious when our rates approach territory we haven’t expected before,” Weber said in an interview with Germany’s Boersen-Zeitung. “Our lowest level so far was 2 percent.”

The difference in yield, or spread, between two- and 10-year notes was at 102 basis points yesterday, from 98 basis points a week earlier. The so-called steepening of the yield curve suggested investors are convinced the economy will deteriorate and the central bank will need to cut borrowing costs.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net