German Government Bonds Post Third Weekly Advance (Correct)

(Corrects record yield level in fourth paragraph of story published Aug. 14.)

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 a record low of 2.39 percent as of 5:20 p.m. yesterday. Greek 10-year bond yields climbed 30 basis points to 10.55 percent.

Bunds rose even as a report yesterday 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 percent from the first quarter, fueling euro- area growth of 1 percent, the fastest in four years. Economists had forecast GDP would rise 1.3 percent in Germany and 0.7 percent in the entire currency region. Spain’s GDP increased 0.2 percent from the previous quarter.

‘Sluggish at Best’

“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 SA 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 percent this year and Irish debt 0.5 percent, compared with an 8 percent 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.

Consumer Prices

The yield difference for Spanish and German 10-year debt widened 32 basis points in the week to 185 basis points, while the Irish-German 10-year bond spread widened 57 basis points to 294 basis points.

Bunds may extend gains next week on speculation prices in the 16-nation euro region fell last month. Euro-area consumer prices fell 0.4 percent in July from June, when they were unchanged, according to a Bloomberg survey before the European Union’s statistics office in Luxembourg publishes the data on Aug. 16.