Bloomberg News

German Bunds Rise on Inflation Data as Spanish Securities Drop

July 16, 2012

German bonds rose, with two-year yields dropping to a record for a third day, as a euro-area report showing inflation held at the slowest since February 2011 added to signs the region is headed for a recession.

Germany’s three-year yields dropped below zero for the first time and rates on Belgian, Dutch and French two-year notes also declined to all-time lows as the debt crisis bolstered demand for safer assets. The Netherlands and France both sold bills at negative yields. Spanish and Italian bonds dropped, with the extra yield investors demand to hold Italy’s 10-year debt instead of Germany’s widening to the most since January.

“The general economic backdrop is poor, so people can’t get too excited about the periphery,” said Eric Wand, a fixed- income strategist at Lloyds Banking Group Plc in London. “General risk sentiment is keeping the core underpinned and investors are looking to rotate through the core and semi-core to find yield.”

Germany’s two-year yield dropped one basis point, or 0.01 percentage point, to minus 0.055 percent at 4:22 p.m. London time after falling to a record-low minus 0.06 percent. The zero percent note due in June 2014 gained 0.025, or 25 euro cents per 1,000-euro ($1,223) face amount, to 100.105.

The three-year yield dropped as low as minus 0.022 percent, and the five-year rate declined three basis points to 0.28 percent after falling to an all-time low 0.27 percent.

Core Nations

German borrowing costs have plunged over the past year as investors sought the nation’s debt as a haven from Europe’s financial turbulence. As yields declined, investors turned to the securities of other so-called core and semi-core nations seeking higher returns, pushing their borrowing rates lower.

Dutch two-year yields fell one basis point to minus 0.01 percent after dropping to a record minus 0.015 percent. Similar- dated French yields declined as low as 0.07 percent. Belgium’s two-year rate dropped to an all-time low 0.254 percent.

The inflation rate in the 17-nation euro region stayed at 2.4 percent in June, the European Union’s statistics office said in Luxembourg, confirming an initial estimate published on June 29. At least seven euro-member states are in recession and Germany’s economy, which helped stem a region-wide contraction in the first quarter, is also cooling.

French Auction

France sold 4 billion euros of 84-day bills at an average yield of minus 0.015 percent, the least on record. The nation also sold 161-day securities at minus 0.011 percent and 343-day debt at minus 0.002 percent, both all-time auction lows, according to data compiled by Bloomberg.

The Netherlands sold 105-day bills at a record-low rate of minus 0.041 percent, and auctioned 7.6 billion euros of 84-, 161- and 343-day securities at negative yields. It raised 2.38 billion euros, less than its maximum target of 4 billion euros.

Volatility on Belgian government debt was the highest in euro-area markets today, followed by Austria and France according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit-default swaps.

Spanish 10-year bonds fell for a third day, with the yield rising 14 basis points to 6.80 percent. The nation’s two-year rate climbed 19 basis points to 4.64 percent.

Spain requested 100 billion euros of international aid for its banks last month, becoming the fourth nation in the euro region to seek assistance, after Greece, Ireland and Portugal. Cyprus has also asked for aid.

The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity German bunds widened 17 basis points to 557 basis points. The spread reached a record 589 basis points on June 18.

Italian Bonds

The yield on Italy’s 10-year bond increased five basis points to 6.11 percent. The two-year rate climbed three basis points to 3.65 percent.

The spread between Italian 10-year bonds and similar- maturity German bunds widened as much as 15 basis points to 495 basis points, the most since Jan. 16.

Moody’s Investors Service lowered Italy’s credit rating by two steps to Baa2 on July 13 and reiterated its negative outlook. The rating company said further cuts were possible because the economic outlook has “deteriorated.”

The spread between German two-year notes and 10-year bonds may shrink to the narrowest in six weeks, according to data compiled by Bloomberg.

The difference, currently at 129 basis points, is below its 50-day moving average of 136 basis points and may target the June 1 low of 113 basis points, the data show.

German bonds returned 4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Dutch bonds also rose 4 percent, Italian securities gained 7.9 percent, while Spanish debt dropped 4.5 percent.

To contact the reporters on this story: David Goodman in London at dgoodman28@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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