German Yields Fall to Record on Europe Debt Concerns; Greek Notes Slide

German bonds completed a weekly gain, with yields falling to record lows, as concern European leaders will fail to solve the region’s debt crisis spurred demand for safer assets.

Austrian 10-year yields also dropped to an all-time low after pledges of support from the Group of 20 nations failed to counter concern the world is headed for another recession. Greek notes slumped as Moody’s Investors Service cut the debt ratings of eight of the nation’s banks, citing concern over their bond holdings. Italy’s bonds declined for a fifth week.

“There are a few pledges to support banks by the G-20 but at the moment it doesn’t seem that there’s enough to suggest this will be a game changer overnight,” said Orlando Green, a fixed-income strategist at Credit Agricole CIB in London. “There’s still a lot of uncertainty in terms of global growth. The risk is on the downside” for yields, he said.

German 10-year yields dropped 11 basis points this week to 1.75 percent at 5:20 p.m. in London, after declining to 1.636 percent today, the least since Bloomberg started collecting data on the securities in 1989. The 2.25 percent note maturing September 2021 gained 1.065, or 10.65 euros per 1,000-euro ($1,351) face amount, to 104.550.

Ten-year bund futures climbed to a euro-era record today and Austrian 10-year yields fell as much as four basis points to a record low 2.48 percent. They were little changed this week.

Stocks Gain

Bonds in so-called core countries such as Germany and Austria have surged this quarter as reports added to speculation the region’s economy is slipping back into a recession and leaders remained divided over how to solve the debt crisis.

Greek Finance Minister Evangelos Venizelos told the ruling party that he sees three possible outcomes to the nation’s debt crisis, including one that involves an orderly default with a 50 percent loss for bondholders, Ta Nea newspaper said, without citing anyone. The European Central Bank may lower its benchmark interest by 50 basis points when policy makers meet next month to bolster the euro-region economy, JPMorgan Chase & Co. said.

The Italian 10-year yield climbed 12 basis points this week to 5.63 percent. Two-year rates increased nine basis points to 4.25 percent.

There’s a “feeling that there’s not really any solution to the European problem,” said Elisabeth Afseth, a fixed-income analyst at Evolution Securities in London. “Italy is also one where growth is an issue, and if you get no help from outside in the form of global growth, that’s going to make their task so much harder.”

Greek Bonds

Greece’s two-year notes dropped every day this week, with yields surging 14.56 percentage points over the period to 69.69 percent. Moody’s cut the credit ratings of National Bank of Greece SA, the country’s biggest bank, and seven other lenders.

Greece committed to additional measures this week to secure the next payment in its 110 billion euro bailout and convince European lawmakers to pass its second aid package worth 159 billion euros.

German bunds pared their weekly gain today after G-20 finance chiefs said they would address rising risks to the world economy. Policy makers are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy,” finance ministers and central bank governors said in a statement yesterday in Washington.

Germany’s government bonds have returned 9.2 percent since June 30, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.S. Treasuries gained 7.4 percent in the period while Greek bonds have tumbled 29 percent.

Volatility Gauge

Volatility on Germany sovereign debt was the highest among euro-area markets today, according to measures of 10-year bonds, two-10-year spreads and credit-defaults swaps. Swings on 10-year bunds were 1.3 times the 90-day average, according to the Bloomberg gauge of developed markets.

Euribor futures rose, pushing the implied yield on the contract expiring in March 2012 down five basis points to 1 percent, signaling increased wagers on lower borrowing costs. The ECB raised rates twice this year to 1.5 percent to counter inflation running above its 2 percent target.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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