Bloomberg News

German 10-Year Yield Falls to Record Low on Recession Concern

September 02, 2011

Sept. 2 (Bloomberg) -- German bonds rose, pushing the 10- year yield to a record low, as U.S. job growth stalled, fueling demand for the safest assets as signals mount that the world’s largest economy is headed toward recession.

Italian and Spanish bonds retreated, while Greek two-year yields soared to a record. U.S. employers added no jobs in August, the weakest reading since September 2010, after an 85,000 increase a month earlier, the Labor Department reported today. Italy’s 10-year bonds dropped for a 10th day, a record streak, amid pessimism over the nation’s ability to implement fiscal reforms.

“The U.S. jobs data has given another lift to Treasuries and bunds,” said John Davies, a fixed-income strategist at WestLB AG in London. “This exacerbates fears that we’re not just slowing down in growth, but may be sliding toward recession. It’s bad news for the peripheral markets, which remain under pressure.”

Ten-year bund yields dropped 13 basis points to 2.01 percent at 4:31 p.m. in London, after falling to 1.996 percent, the lowest since at least 1999. The 2.25 percent security maturing in September 2021 rose 1.18, or 11.80 euros per 1,000- euro ($1,421) face amount, to 102.115. The two-year note yield dropped 10 basis points to 0.54 percent after declining to 0.52 percent, the least since June 18, 2010.

Bund Futures

German 10-year bund futures climbed to a record. The contract expiring in September rose as much as 1.2 percent to 136.97 before settling at 136.74.

Bunds rose yesterday as data showed euro-area manufacturing shrank more than initially estimated in August. Europe’s economy is cooling as governments enact spending cuts to narrow their budget deficits, sapping consumers’ willingness to spend.

Ten-year German yields dropped 32 basis points last month as investors sought the safety of government debt, spooked by plunging stocks. The safest bonds were also lifted as the Federal Reserve pledged on Aug. 9 to keep borrowing costs near zero until mid-2013.

Italian 10-year yields climbed 13 basis points to 5.28 percent, the highest level since Aug. 9. The nation’s two-year note yield added 11 basis points to 3.52 percent.

The 10-year Italian spread over German bunds widened 25 basis points to 327 basis points, the most since Aug. 8, when the ECB began buying Italy’s debt. Costs to insure Italian bonds using credit-default swaps surged to a record 398 basis points, according to CMA.

Trichet, Berlusconi

Prime Minister Silvio Berlusconi on Aug. 29 agreed to overhaul the 45 billion-euro austerity plan of Aug. 5, which had helped persuade the ECB to start buying Italy’s bonds. While the full impact of the changes remain unclear, Berlusconi dropped a tax on the highest earners and limited funding cuts to regional governments.

European Central Bank President Jean-Claude Trichet said Italy must confirm its commitment to deficit reduction. European stocks tumbled, paced by banks.

The Aug. 5 plan is of “extreme importance” and must be “fully confirmed and substantiated,” Trichet said in an interview with Il Sole 24 Ore published today.

Spain’s 10-year bond yields rose eight basis points to 5.13 percent as a report showed unemployment grew in August, while the two-year yield jumped four basis points to 3.54 percent.

Registered unemployment in Spain, which has the highest jobless rate in Europe, expanded for the first time in five months, the nation’s labor ministry said today. The number of people signing up for benefits climbed 51,185 to 4.13 million.

‘Nasty’ Unemployment

“Spanish unemployment was nasty, there’s zero progress on a second bail out for Greece -- the ECB needs to be jumping back in to the market more aggressively,” Davies said.

Investors demanded more than three percentage points of extra yield to hold Spain’s 10-year bonds instead of their German counterparts, the first time the spread reached that level since the ECB started buying Spanish debt almost a month ago. The spread widened to as much as 3.11 percentage points.

The Stoxx Europe 600 Index lost 3 percent, snapping a four- day rally, while the Standard & Poor’s 500 Index dropped 1.6 percent.

The ECB has restrained Italian and Spanish borrowing costs by buying bonds in the secondary market over the past three weeks after contagion from the debt crisis sent both nations’ 10-year yields to euro-era records at the start of August.

Greek notes headed for their sixth weekly decline. Two-year yields soared as much as 436 basis points, or 4.36 percentage points, to 47.29 percent.

“Investors are taking risk bets off the table, and that’s pressuring peripheral bonds,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich. “Markets have priced in sluggish global growth and are struggling to see what’s coming next.”

German government bonds have returned 5.7 percent this year, while Treasuries gained 7.7 percent, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Spanish bonds have returned 4.8 percent and Italy’s have lost 0.4 percent, the indexes show.

--With assistance from Abigail Moses in London. Editors: Mark McCord, Nicholas Reynolds

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

To contact the editor responsible for this story: Keith Campbell at k.campbell@bloomberg.net


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