Bloomberg News

German Two-Year Notes Advance as Investor Confidence Slides

June 21, 2011

June 21 (Bloomberg) -- German two-year notes advanced, reversing an earlier decline, after a report showed investor confidence in Europe’s largest economy dropped to the least in 2 1/2 years as the region’s debt crisis worsened.

The advance pushed the two-year yield down for the first time in three days. The 10-year bund yield was within five basis points of a six-month low. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict developments six months in advance, fell to minus 9 from plus 3.1 in May. That’s the lowest since January, 2009. Economists predicted a decline to minus 3, according to a Bloomberg News survey.

“The ZEW numbers suggest the German recovery may be losing some momentum,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “That’s giving some support to bunds. Direction in the market is dictated by developments in Greece.”

The two-year note yield fell one basis point to 1.52 percent as of 12:57 p.m. in London after earlier climbing as high as 1.53 percent. It dropped to 1.43 percent on June 16, the least since Feb. 22. The 1.75 percent security due June 2013 rose 0.015, or 15 euro cents per 1,000-euro ($1,435) face amount, to 100.45.

The 10-year bund yield was little changed at 2.97 percent. It reached 2.91 percent on June 16, the lowest since Jan. 11.

German Haven

Bunds have gained this year as investors seek a haven amid mounting concern that policy makers will fail to contain the euro region’s sovereign-debt crisis.

German government bonds have returned 0.3 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, while Treasuries gained 3.3 percent. Greek and Portuguese securities have both lost 19 percent, while Irish debt has dropped 11 percent, the indexes show.

Greek bonds rose as Prime Minister George Papandreou faces a confidence vote that may determine whether the nation becomes the first euro-area country to miss a debt payment. European Union leaders have insisted Papandreou secure multi-party support for austerity measures that are a condition of the aid needed to avoid default as soon as next month.

Greece Focus

“The market’s focus is very much on Greece, and the no- confidence vote is in the spotlight,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “Papandreou needs to get over that hurdle. There may be signs of more erosion of his support, and that may not go down well with the market. It’s a must-clear hurdle.”

Greek 10-year bond yields dropped nine basis points to 17.26 percent. They rose to a euro-era record 18.35 percent on June 17. Two-year yields, which surpassed 30 percent for the first time last week, fell for a third day, dropping 58 basis points to 28.03 percent.

Greece sold 1.25 billion euros of 91-day Treasury bills at an average yield of 4.62 percent. Investors bid for 2.94 times the amount of debt on offer. That compares with a so-called bid- to-cover ratio of 3.3 at the previous auction of similar- maturity securities held on May 17, which were allotted at 4.06 percent.

Portuguese 10-year yields fell four basis points to 11.11 percent. They reached an all-time high 11.19 percent yesterday. Two-year note yields were little changed at 13.18 percent after reaching an all-time high 13.26 percent yesterday.

‘Crisis Levy’

Irish 10-year yields declined eight basis points to 11.38 percent. The yield jumped to a record 11.70 percent on June 17.

Spain sold 3 billion euros of three- and six-month bills. The Treasury in Madrid said it sold 632 million euros of three- month bills at an average yield of 1.568 percent, compared with 1.380 percent at the last sale on May 24. Spain also sold 2.36 billion euros of six-month debt at an average yield of 1.776 percent, compared with 1.766 percent on May 24.

Ministers at a euro-crisis meeting in Luxembourg “forcefully reminded the Greek government” to fulfill its commitments, Luxembourg Prime Minister Jean-Claude Juncker told reporters yesterday. Decisions on the next payout and a three- year follow-up package were put off until early July.

The International Monetary Fund, contributor of a third of the bailout money for Greece, Ireland and Portugal, has warned European leaders that a failure to take decisive action on the debt crisis risks triggering “large global spillovers.” At the same time, Papandreou is struggling to convince Greeks to accept a 78 billion-euro package of state-asset sales and budget cuts, which include a “crisis levy” on wages.

-- With assistance from Maria Petrakis in Athens and Angeline Benoit in Madrid. Editors: Matthew Brown, Mark McCord

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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