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German Bond Yields Fall to Record After Spanish Bank Downgrades

May 18, 2012

German two-, five-, 10- and 30-year bond yields dropped to all-time lows after Moody’s Investors Service lowered the credit ratings of 16 Spanish banks, spurring demand for Europe’s safest government debt.

Benchmark bunds headed for a fifth weekly advance as a report showed German producer-price inflation slowed in April. Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA) were among lenders cut by Moody’s, which cited economic weakness and Spain’s budget strains. Separately, Greece’s credit grade was lowered one level by Fitch Ratings. The cost of insuring Spanish government debt against default rose to a record high.

“We saw a classic flight to quality after the bank downgrades,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “They were more aggressive than expected, and the ratings agencies will be looking at the banking systems of other euro-zone countries. The downgrades came on the back of fears of bank runs, and that’s supporting demand for bunds.”

German 10-year yields were little changed at 1.42 percent as of 11:12 a.m. London time, after falling as much as two basis points, or 0.02 percentage point, to 1.396 percent. That’s the first time the rate has dropped to less than 1.40 percent. The 1.75 percent security due in July 2022 traded at 103.115.

The two-year note yield slid to 0.031 percent, while the five-year rate dropped to 0.463 percent, also records. The 30- year bund yield fell to an all-time low of 2.046 percent.

All-Time Lows

The yields on Finnish, Dutch and Austrian 10-year government securities also reached all-time lows as investors sought the highest-rated euro-denominated debt.

Spain’s borrowing costs jumped at a debt sale yesterday after Prime Minister Mariano Rajoy said May 16 the nation risked losing access to market funding.

Spanish government bonds reversed earlier declines, leaving the 10-year bond yield nine basis points lower at 6.22 percent, after rising as much as seven basis points to 6.38 percent. The rate surged to more than 6.50 percent on May 16 for the first time since November.

Credit-default swaps on Spain rose five basis points to 556 basis points, after being quoted at an all-time high of 560.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Italian bonds also reversed an earlier drop, leaving the 10-year yield nine basis points lower at 5.73 percent, after reaching as much as 5.91 percent.

Fitch cut Greece’s long-term credit rating to CCC from B-, citing heightened risk that the nation may not be able to sustain membership of the monetary union.

Producer Prices

German producer prices increased 2.4 percent in the year to April, down from a 3.3 percent rise a month earlier, the Federal Statistics Office in Wiesbaden said today.

German Finance Minister Wolfgang Schaeuble said that European countries need to form a common position at Group of Eight meetings as quickly as possible.

“During the G-8, it’s very important to see that the Europeans form a common position as quickly as possible,” Schaeuble said today on Europe 1 radio. “In recent years we haven’t been quick enough.”

Leaders of the Group of Eight nations gather at a summit at Camp David, the U.S. presidential retreat in Maryland today.

2-10 Spread

Longer-maturity German bonds have outperformed shorter- dated notes this week with the difference in yields between two- year notes and 10-year bunds falling to the least in more than six months.

The spread was little changed today at 137 basis points. That’s down from 142 basis points on May 11 and matches the least since Nov. 1, according to data compiled by Bloomberg based on closing prices. It may find resistance at the November low of 133 basis points, and encounter support at the 200-day moving average at 158 basis points, the data show.

German debt has returned 3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds have lost 3.6 percent, the data show.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at; Keith Jenkins in London at

To contact the editor responsible for this story: Daniel Tilles at

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