Bloomberg News

German Note Yields Fall Below Zero on ECB Outlook, Safety Demand

December 01, 2011

Nov. 30 (Bloomberg) -- German one-year notes rallied, pushing the yield below zero for the first time, amid speculation the European Central Bank will intensify its economic stimulus and crisis-fighting measures.

Two-year German yields fell to a record after the ECB and five other central banks agreed to reduce the interest rate on dollar liquidity swap lines to ease strains in financial markets. Euribor futures advanced, signaling investors were adding to bets for lower borrowing costs. Belgian and Italian bonds rallied.

The negative yield on one-year notes means investors are “willing to take a loss on the price just for the security of owning Germany,” said Harvinder Sian, a fixed-income strategist at Royal Bank of Scotland Plc in London. “It’s an illustration of the fact the euro zone has far fewer fireproof securities, and it’s an indication of the current situation, that the ECB is going to cut rates to record levels.”

The one-year yield fell nine basis points to minus 0.01 percent at 4:15 p.m. London time after dropping to minus 0.07 percent, the first time it has declined below zero since Bloomberg began collecting data on the notes in 1995. The 1 percent security due December 2012 climbed 0.09, or 90 euro cents per 1,000-euro ($1,347) face amount, to 101.035.

Two-year yields declined as much as 16 basis points to a record low 0.277 percent. The rate has fallen 21 basis points this month.

Rate Outlook

Investors are paying money to lend to Germany for the first time as demand for the safest securities swells while Europe’s debt crisis deepens, similar to the rates on U.S. Treasury bills, which turned negative for the first time in December 2008.

The demand for shorter-dated assets is increasing the difference in yield between two-year notes and 10-year bonds, which climbed to 196 basis points today, the most since January.

At the same time, central banks are making cash available to lenders, boosting the allure of short-dated notes. The Federal Reserve said today it will cut the cost of emergency dollar funding for European banks as part of globally coordinated action.

The ECB bought Italian and Irish bonds, according to at least two people with knowledge of the deals, who declined to be identified because the trades are private. The central bank unexpectedly cut its key interest rate by a quarter percentage point to 1.25 percent on Nov. 3, after raising rates twice this year from a record-low 1 percent. The next meeting is on Dec. 8.

Euribor Futures

Euribor futures rallied, pushing the yield on the March 2012 contract down 14 basis points to 1 percent.

There are two factors for the gain in German notes, “one is a debt crisis reason and one is an ECB policy reason,” said John Davies, a fixed-income strategist at WestLB AG in London. “That’s unleashed some extra buying at the short end.”

Euro-area finance ministers meeting yesterday said they would seek a greater role for the International Monetary Fund and ECB in fighting the debt crisis after conceding the effort to expand their bailout fund missed its target.

European heads of government meet on Dec. 9 in Brussels, with Germany pushing for governance changes that would tighten enforcement of budget rules. The move might make it easier for the ECB to play a bigger part in supporting euro-area nations, possibly channeling loans through the IMF, two officials familiar with the matter said yesterday.

Euro Rallies

The euro rallied 1.2 percent to $1.3476 and the Stoxx Europe 600 Index of equities climbed 3.5 percent after the central banks announced their plan. Ten-year bonds from Belgium to Italy outperformed German bunds.

“This reduces the funding strains in the banking system,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA in London. “That’s risk-positive and bad for bunds.”

Volatility on Belgian sovereign debt was the highest in euro-area markets today followed by the Netherlands, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Portugal’s government bonds slumped even as the nation’s parliament approved the government’s 2012 budget proposal in a final vote today.

Portuguese Bonds

Some investors may be selling Portuguese securities before the end of this month after the nation’s credit ranking was downgraded to non-investment grade by Fitch Ratings on Nov. 24, said David Schnautz, a fixed-income strategist at Commerzbank AG in London. Barclays Plc said on Nov. 24 that it will cut Portuguese government bonds from its Euro Treasury Index at the end of November.

Ten-year Portuguese yields climbed 45 basis points to 14.05 percent after touching a record 14.13 percent. Two-year note yields were 69 basis points higher at 18.77 percent. They have risen more than four percentage points since this time last week.

German bonds have returned 6.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds have lost 11 percent and Spanish debt has fallen 1.1 percent.

--Editors: Mark McCord, Nicholas Reynolds

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

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


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