Germany’s bonds rose, with 10-year yields falling to the lowest level in nine weeks, after European Central Bank President Mario Draghi said inflation was subdued and the debt crisis was starting to hurt the nation’s economy.
Two-year yields dropped by the most since July as German industrial production shrank more than economists forecast and the European Commission halved its 2013 growth estimate for the country. Greek 10-year bonds declined as Prime Minister Antonis Samaras seeks to gain parliamentary approval for austerity measures needed to unlock further bailout funds. Finland’s two- year yields fell below zero for the first time since August.
“Saying the outlook is weaker than many people may have thought and inflation risks are not as serious means investors don’t need to fear an imminent sell-off in bunds,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “This puts you back into risk-off mode and then you would be looking to hold the bonds of the economically strongest credits, like bunds.”
Germany’s 10-year yield fell six basis points, or 0.06 percentage point, to 1.38 percent at 4:21 p.m. in London after dropping to 1.36 percent, the lowest level since Sept. 3. The 1.5 percent bund due in September 2022 gained 0.565 or 5.65 euros per 1,000-euro ($1,275) face amount, to 101.12.
Two-year yields slid three basis points to minus 0.038 percent after dropping as much as five basis points, the biggest decline since July. 30. A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.
“The weak overall economic situation, combined with slow money growth, means that the risks of inflation are currently very low over the medium term,” Draghi said in a speech at a conference in Frankfurt. “Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area. The latest data suggest that these developments are now starting to affect the German economy.”
The ECB meets tomorrow and will leave its benchmark interest rate unchanged at a record low of 0.75 percent, according to all but one of 63 economists in a Bloomberg News survey. Draghi will hold a press conference at 2:30 p.m. in Frankfurt to discuss the decision.
“Today’s comments are likely to be reiterated tomorrow,” Annalisa Piazza, a strategist at Newedge Group in London, wrote in an e-mail to clients. “In a nutshell, a weaker economic scenario and low inflation leave the door open for further cuts in the coming months.”
The European Commission cut its forecast for euro-zone growth next year, predicting the economy will expand 0.1 percent, down from a May prediction of 1 percent. It also lowered its target for Germany to 0.8 percent from 1.7 percent.
France will miss its goal of cutting the budget deficit to the euro-area limit of 3 percent of gross domestic product in 2013, the commission said.
France’s 10-year bonds underperformed German bunds, with the additional yield investors demand to hold the French securities expanding as much as five basis points to 82 basis points, the most since Oct. 5, before settling at 80 basis points. The French 10-year yield dropped three basis points to 2.18 percent.
Greek bonds snapped a two-day advance before the parliament votes on additional austerity measures required by Nov. 12 to free up a 31 billion-euro portion of international aid.
Prime Minister Antonis Samaras can in theory count on the backing of 175 lawmakers from the three parties supporting his government. Democratic Left, a coalition partner with 16 seats, has said it won’t approve changes to labor laws it says have no fiscal benefit.
“There’s positive sentiment related to Greece and what looks to be the likely passage of the austerity bill,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London.
The Greek 10-year yield rose five basis points to 17.27 percent. The 2 percent bond due in February 2023 dropped to 32.345 percent of face value.
Volatility on French bonds was the highest in euro-region markets today, followed by those of Finland, according to measures of 10-year debt, the spread between two- and 10-year securities, and credit default swaps.
The yield on Finland’s two-year note fell three basis points to minus 0.011 percent after dropping to minus 0.019 percent. The yield has been positive since Aug. 15.
German bonds returned 3.5 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. France’s securities gained 8.5 percent and Finland’s rose 5.6 percent.
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