German Two-Year Note Yield Rises to Highest Since 2008 on Inflation Bets

German two-year government note yields climbed to the highest since December 2008 amid speculation that reports this week will show rising commodity prices are fueling inflation.

Benchmark 10-year yields rose above 3.5 percent for the first time in 19 months. European data on April 15 is forecast to confirm euro-area inflation accelerated to the fastest in more than two years in March. Crude oil reached $127.02 per barrel today, the highest since 2008. Greek debt was little changed after Germany said the nation may need more support.

Oil prices are “fostering inflation expectations and driving rate-hike expectations, but might dampen longer-term growth prospects,” said Kornelius Purps, an interest-rate strategist at UniCredit SpA in Munich. “It would be reasonable to expect this form of curve movement, particularly in a week where we are strongly focusing on inflation.”

The yield on the two-year note gained as much as four basis points to 1.94 percent, the highest since Dec. 17, 2008, and was at 1.91 percent at 4:32 p.m. in London. The 1.5 percent security due March 2013 fell 0.01, or 10 euro cents per 1,000-euro ($1,446) face amount, to 99.24. The benchmark 10-year bund yield breached 3.50 percent for the first time since Aug. 13, 2009.

Oil Surge

Brent oil for May settlement surged 6.7 percent last week as unrest in Libya disrupted output and investors bought commodities as a hedge against the declining dollar. The contract was recently down 0.4 percent to $126.15.

France’s three-year breakeven rate, a market gauge of inflation expectation derived from yield difference between nominal and index-linked bonds, climbed four basis points to 2.37 percentage points today.

French government debt was little changed after an auction of 7.5 billion euros of 84-, 175- and 357-day bills today.

Germany sold 4 billion euros of six-month bills at an average yield of 1.0884 percent, the Bundesbank said. It had a maximum target of 5 billion euros.

The Greek 10-year yield was little changed at 12.86 percent. It earlier fluctuated after German Finance Minister Wolfgang Schaeuble said it’s unclear whether Greece will need another cut in its bailout rate or extension of repayment terms. He spoke after a meeting of European Union finance ministers and central bank chiefs on April 9 in Godollo, Hungary.

Portuguese 10-year yields fell three basis points to 8.63 percent. A delegation from the EU to Portugal this week is conducting a technical evaluation before negotiations on a bailout begin. The EU set a mid-May deadline to arrange a three- year lending program estimated at 80 billion euros.

Irish Rally

Irish government debt yields slid for a seventh day, pushing the benchmark yield down eight basis points to 9.16 percent, as investor confidence in the nation rose following the results of bank stress tests.

The difference in yield, or spread, between Irish 10-year debt and equivalent German securities has narrowed about 120 basis points to 566 since Ireland’s central bank on March 31 told four lenders to raise 24 billion euros and announced plans to merge two of them after the tests.

“This piece of new information was credible,” said Purps. “The situation has now turned from an uncertain risk to a certain risk, and having certainty alone was apparently worth about 100 basis points of tightening.”

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

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

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