German bunds led gains in European government securities on bets the U.S. budget debate that threatened a default will prompt the Federal Reserve to maintain stimulus, underpinning the appeal of fixed-income assets.
Spanish and Italian government bonds rallied after a report showed the euro-area economy emerged from a record-long recession in the second quarter, spurring demand for the region’s higher-yielding assets.
Investors were so concerned about protecting their money from the European debt crisis last month they paid to hold Dutch government notes. An election this week is now raising questions about that status as a shelter.
U.S. stocks fell as Macy’s Inc. paced a drop in retailers after reducing its earnings forecast and economists predicted the Federal Reserve will taper asset purchases next month. Italian and Spanish bonds rose with European shares as the euro area exited its longest recession.
U.K. government bonds fell, pushing 10-year yields to the highest since October 2011, as reports showing inflation stayed above the central bank’s target and house prices rose sapped demand for fixed-income assets.
German two-year note yields climbed to the highest in 10 months as banks’ plans to repay European Central Bank loans added to signs the debt crisis is abating and damped demand for the region’s safest fixed-income assets.
Government bond sales in the euro region will increase by 1 billion euros ($1.27 billion) to a gross 990 billion euros in 2011 as increased redemptions outweigh improved government finances, ING Groep NV said.
Prime Minister Silvio Berlusconi ’s longest-term bonds yield almost as much as Spain’s even though Italy’s deficit is less than half, a sign Europe’s debt crisis has created relative bargains for fixed-income investors.