German Bond Yields Reach a New Record Low as Stiglitz Warns of Recession
German 10- and 30-year bond yields reached record lows as falling stocks boosted demand for safety and Nobel Prize-winning economist Joseph Stiglitz said the euro region may slip back into recession as governments cut spending.
Government bonds gained across the world, pushing the U.S. two-year Treasury yield to a record low, while 10- and two-year yields in the U.K. also reached all-time lows. Bond markets in so-called peripheral markets lagged behind, as the extra yield, or premium, investors demand to hold Irish 10-year bonds instead of similar maturity German debt widening to the most on record. Euro-region industrial new orders growth slowed to 2.5 percent in June, the European Union statistics office said.
“The very strong momentum in the bund market is still in place,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “There is nothing happening today that is going to stop yields from printing new records.”
The yield on the 10-year bund fell 10 basis points to 2.19 percent as of 3:52 p.m. in London. The 2.25 percent security due September 2020 rose 0.90, or 9 euros per 1,000-euro ($1,269) face amount, to 100.58. Thirty-year yields dropped 12 basis points to 2.79 percent.
Bunds extended gains and stocks’ decline deepened after a report showed sales of U.S. previously owned homes plunged 27 percent in July, twice as much as forecast, providing more evidence that foreclosures and limited job growth are depressing the market.
“Cutting back willy-nilly on high-return investments just to make the picture of the deficit look better is really foolish” for European governments, Stiglitz said in an interview on Dublin-based RTE Radio today. Budget cuts mean “Europe is at risk of going into a double-dip,” he said.
Lower Yields
Yields on bunds, gilts and Treasuries slid this month as data from the U.S. missed estimates. A Citigroup Inc. index of U.S. economic data surprises fell to minus 59 last week, the least since January 2009. The number of unemployment claims unexpectedly shot up by 12,000 to 500,000 in the week ended Aug 14, Labor Department figures showed on Aug. 19. The euro- region’s data surprises index was at 103.3 yesterday.
German 10-year yields fell further than two-year yields, leaving the so-called yield curve at its flattest since January 2009. The difference in yield between the two securities fell to 159 basis points, or 1.59 percentage point, from 168 basis points yesterday.
Treasuries and gilts jumped, with the yield on the U.S. 10- year note down nine basis points to 2.51 percent and the equivalent-maturity U.K. yield slipping as much as 13 basis points to 2.85 percent, a record low. The U.S. two-year note yield touched 0.4542 percent.
Bank Tests
German government bonds have returned 2.7 percent this month, the most since November 2008, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. That compares with 1.4 percent for U.S. Treasuries and 3 percent for U.K. gilts.
European banks may face more frequent stress tests to bolster confidence, said Europe’s top economy official, Olli Rehn. The European Union is considering at what “kind of interval” to repeat the exercise that ended last month, Rehn, the EU commissioner for economic and monetary affairs, said yesterday in a Bloomberg Television interview in New York.
EU regulators carry out yearly stress tests on the biggest lenders in the region. Last month 91 institutions, accounting for 65 percent of Europe’s banking industry, were examined on their resilience in the event of a shrinking economy and a drop in government bond values.
The Europe Stoxx 600 Index slid 1.8 percent, while the MSCI World Index dropped 1.1 percent. Japan’s Nikkei 225 Stock Average declined 1.3 percent to its lowest close since May 1, 2009. The gauge has fallen 21 percent from an 18-month high on April 5, a drop that signifies a bear market to some analysts.
Irish Spreads
The yield on Irish 10-year government bonds rose relative to German bunds, pushing the so-called yield spread to 316 basis points, the most since at least 1991, when Bloomberg started compiling the data. The previous record was set before the European Union and the International Monetary Fund set up a 750 billion-euro ($947 billion) fund to protect the single currency on break-up on May 8.
The Greek-German spread widened 29 basis points to 891 basis points, more than 100 basis points wider this month and less than 100 basis points from the record set on May 7.
The Portuguese-German spread widened 10 basis points to 307 basis points and the Spanish spread grew five basis points to 184 basis points.
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
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