Bloomberg News

German Two-Year Yields Below Zero After Bernanke, Spanish Sale

July 17, 2012

German two-year note yields stayed below zero as investor confidence declined to a six-month low and Federal Reserve Chairman Ben S. Bernanke refrained from announcing new policy measures to boost the U.S. recovery.

Bunds erased earlier declines after Bernanke said progress in reducing unemployment was likely to be “frustratingly slow.” Austria’s two-year yield fell below zero for the first time as investors sought higher returns than German debt. French bond yields fell to records, pushing the premium investors demand to hold the securities instead of bunds to the narrowest in nine months. Spain’s notes dropped as the nation sold bills.

“German yields below zero are a sign for many investors to give up some safety for the higher yields they can find in the semi core,” saidPiet Lammens, head of research at KBC Bank NV in Brussels. “It’s a story of the semi-core countries such as Austria, France and Belgium. The safety of these bonds is good enough in comparison to Spain and Italy.”

Germany’s two-year note yield was little changed at minus 0.05 percent at 5 p.m. London time after dropping to a record minus 0.061 percent. The zero percent note due in June 2014 traded at 100.09. The 10-year yield was unchanged at 1.23 percent.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations in Germany, fell to minus 19.6, the lowest since January, adding to evidence output in the region’s largest economy is coming under pressure from the sovereign debt crisis.

‘Decelerated Somewhat’

“The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year,” Bernanke said in testimony to the Senate Banking Committee in Washington. The Fed is “prepared to take further action as appropriate to promote a stronger economic recovery,” he said.

Minutes of the Fed’s June meeting showed a few participants believed the Fed will need to do more, while several others said new easing would be warranted if growth slows.

“Bernanke is keeping the door ajar for further monetary easing if the U.S. economy takes a turn for the worse but the chances of a move in August have diminished,” reducing demand for Treasuries and bunds, said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh.

France, Austria

The French 10-year yield dropped six basis points, or 0.06 percentage point, to 2.09 percent after falling to a record 2.07 percent. The spread over similar-maturity bunds narrowed to as little as 85 basis points, the least since October 2011. Two-and five-year yields also declined to records.

Austria’s 10-year yield fell five basis points to 1.88 percent after reaching a record low 1.861 percent. The two-year yield slid as much as three basis points to a record minus 0.018 percent, before rising four basis points to 0.05 percent.

Austria, which was stripped of its AAA rating by Standard & Poor’s this year, has the lowest unemployment in the European Union and has a ratio of debt to gross domestic product of 72 percent, beaten only by the Netherlands, Finland and Spain among major economies sharing the euro. It still holds a top credit grade at Fitch Ratings and Moody’s Investors Service.

“There is a steady hunt for yield” supporting bonds of countries including Austria and France, said Lyn Graham Taylor, a fixed-income strategist at Rabobank International in London. Investors will focus on the Spanish “bond sale later this week,” he said, referring to the offerings of notes due between 2014 and 2019 planned for July 19.

Bill Sale

Spain sold 3.56 billion euros of bills today, surpassing its maximum target of 3.5 billion euros. The Treasury auctioned 12-month securities at an average yield of 3.918 percent, versus 5.074 percent at the previous sale on June 19, and 18-month bills at 4.242 percent, compared with 5.107 percent.

Spanish notes declined, with the two-year yield rising eight basis points to 4.73 percent.

Irish notes advanced as Finance Minister Michael Noonan met for talks with European Central Bank President Mario Draghi.

The talks took place against the backdrop of a possible move by the ECB to advocate losses on senior bondholders at some euro-area banks.

The yield on Ireland’s 4 percent note due in January 2014 dropped 28 basis points to 4.25 percent.

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

German bunds have returned 4.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Austrian debt gained 7.8 percent, and French bonds rose 7.7 percent, the indexes show.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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


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