By Anna Rascouet Oct. 15 (Bloomberg) -- European bonds fell as Spain and France sold a combined 13.5 billion euros ($20.1 billion) of debt, U.S. banks posted earnings that beat estimates and manufacturing in the New York region expanded for a third month. The decline drove the yield on the German 10-year bund to the highest level in almost three weeks as Goldman Sachs Group Inc. reported third-quarter earnings of $3.19 billion and Citigroup Inc. posted an unexpected profit. The Federal Reserve Bank of New York’s general economic index soared to its highest level in five years. Today’s bond sales are part of a record 33 billion euros being sold by euro-region governments this week, according to Commerzbank AG. “We have ongoing supply issues and bunds will suffer the consequences,” said John Davies, a fixed-income strategist at WestLB AG in London. “The course of the third-quarter earnings season is surviving to the upside.” The yield on the bund, Europe’s benchmark government security, rose 6 basis points to 3.29 percent as of 1:55 p.m. in London, after earlier climbing to 3.30 percent, the highest level since Sept. 25. The 3.5 percent security maturing July 2019 dropped 0.52, or 5.2 euros per 1,000-euro face amount, to 101.72. The two-year note yield climbed 4 basis points to 1.38 percent. Bonds fell even as a report showed the region’s consumer prices declined for a fourth month in September. The European Union’s statistics office in Luxembourg said prices dropped 0.3 percent last month from a year earlier. Goldman Earnings Goldman Sachs’s net income more than doubled in the three months ended Sept. 25 from $845 million in last year’s third quarter, the New York-based company said today in a statement. Citigroup posted a $101 million profit, defying analysts’ expectations for a loss, on higher deposit and loan volumes. Germany’s economy will resume export-led growth next year after shrinking 5 percent in 2009, the country’s main economic institutes said. Europe’s largest economy will expand 1.2 percent in 2010 while unemployment rises as government stimulus programs wane, the four institutes said in their fall forecast in Berlin today. In April, they forecast a 0.5 percent-drop in gross domestic product in 2010 and a 6 percent contraction this year. European Central Bank President Jean-Claude Trichet said the bank will unwind its unconventional measures and withdraw policy stimulus once the economic situation normalizes and said he sees “more and more” signs that the economy is stabilizing. ‘Still Premature’ “It is still premature to declare the financial crisis to be over,” Trichet said in a speech in Frankfurt today. “But when the appropriate time comes, there should not be any concern about the ECB’s ability to exit.” Policy makers worldwide reduced interest rates to all-time lows, including coordinated cuts by six central banks more than a year ago, to stabilize economies following the collapse of Lehman Brothers Holdings Inc. France sold a total of 8 billion euros of 1.5 percent notes due in 2011, 4 percent debt due in 2013 and 4 percent and 3 percent securities, both due in 2014. It also auctioned 1.7 billion euros of inflation- protected securities due in 2020, 2023 and 2040. Spain auctioned 3.7 billion euros of 4.3 percent bonds due Oct. 2019 and 4.4 percent bonds due Jan. 2015, with bid-to-cover ratios of 2.16 and 2.08 respectively, higher for both securities than at their previous sales. The country had hoped to sell as much as 4 billion euros of securities. ‘Better’ Auctions “This time the French auction went much better than last time, especially for the two-year bond as demand for the short end is still very strong,” said David Schnautz, a fixed-income strategist at Commerzbank AG. “Spain also did O.K. this time, just short of the upper end of their range.” The difference in yield, or spread, between French and German 10-year securities was little changed at 35 basis points. The Spanish-German 10-year spread narrowed 2 basis point to 60 basis points. Bonds stayed low after the New York Fed said its index soared to 34.6, the highest since mid-2004, from 18.9 in September, marking the first time the measure has shown expansion for at least three months since the period ended in January 2008. Readings above zero for the Empire State index signal manufacturing is growing. The number of Americans filing first-time claims for unemployment benefits dropped last week to the lowest level in nine months, Labor Department data showed today. German government bonds earned investors 2 percent from June 30 though Oct. 14, compared with 3.6 percent for U.K. gilts and 1.7 percent for U.S. Treasuries, Merrill Lynch & Co. indexes showed. French bonds returned 2.1 percent and Spanish debt rose 2.5 percent, according to the indexes. To contact the reporter on this story: Anna Rascouet in London at arascouet@bloomberg.net

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