By Lukanyo Mnyanda Nov. 20 (Bloomberg) -- German government bonds were little changed, headed for the first weekly gain in three, as a decline in producer prices fueled concern a rally in stocks may have outpaced prospects for economic growth. The yield on the 10-year bund was within 1 basis point of its lowest level since Nov. 3 after the Bundesbank said October producer prices fell in the year more than economists predicted. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the Chinese may have “a bubble of their own to confront.” Greek 10-year bonds headed for their biggest weekly decline since September. “There’s growing uncertainty about the outlook for the global economy,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks and money managers. “Bonds will remain well bid in this environment.” The yield on the bund, Europe’s benchmark government security, was little changed at 3.26 percent at 10:11 a.m. in London. The 3.25 percent security due in January 2020 gained 0.06 or 60 euro cents per 1,000 euro ($1,487) face amount, to 99.91. The two-year yield was at 1.30 percent. Traders reduced bets this month on an increase in interest rates by the European Central Bank, with the yield on the Euribor futures contract expiring in June sliding to 1.08 percent today, from 1.27 percent on Oct. 30. Producer prices in Germany, the biggest of the 16 economies that share the euro, declined 7.6 percent from a year earlier, the same as in September, the Federal Statistics Office in Wiesbaden said today. Economists in a Bloomberg survey had forecast a 7.5 percent contraction. Inflation Expectations The German 10-year breakeven rate was the lowest since Nov. 3. The gauge of inflation expectations, as measured by the difference in yield between regular and index-linked debt, was at 1.76 percentage points, from a year-to-date high of 1.96 percentage points on Sept. 23. The rate reflects the inflation level traders expect during the life of the security. German bonds have returned 2.6 percent since June 30, the same as U.S. Treasuries, according to Merrill Lynch indexes. Asian and European stocks declined today and Treasury three-month bill rates turned negative yesterday for the first time since last year’s credit freeze. Europe’s Dow Jones Stoxx 600 Index of European shares lost 0.7 percent, headed for its first weekly loss in three. The index has climbed 54 percent since March 9. “Systemic Risk” The “systemic risk” of new asset bubbles in global economies and markets is rising with the Federal Reserve keeping interest rates at record lows, Gross wrote in his December investment outlook posted on Pimco’s Web site yesterday. “If we have some kind of bubble bursting in equity markets then we’ll certainly have a short-term effect that will bring down yields due to flight-to-security issues,” said Cyrus de La Rubia, a fixed-income analyst in Hamburg at HSH Nordbank. The difference in yield, or spread, between Greek and German 10-year bonds was at 171 basis points today, the most since July 13. The yield on the Greek securities increased 21 basis points since Nov. 13 to 4.97 percent today. That’s the biggest weekly increase since the period through Sept. 4. Two-year notes in so-called peripheral countries from Greece to Spain underperformed longer-dated bonds as investors used recent declines of longer-dated securities to take advantage of higher yields. Greek two-year bonds yielded 352 basis points less than 10-year securities, down from 356 basis points yesterday, according to Bloomberg generic prices. “From a short-term perspective, the carry is favorable,” said David Schnautz, a fixed-income strategist in Frankfurt at Commerzbank AG, Germany’s second-largest lender. “There’s much more juice further up the curve, although you also face more risk.” To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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