German Five-, 30-Year Yields Drop to Records This Week on European Crisis

German bonds gained this week, with five-year and 30-year yields falling to records, as government officials said Standard & Poor’s may lower the credit ratings of some euro-area nations, spurring demand for the safest assets.

Italian 10-year bonds rose for the first week in a month as the nation’s borrowing costs fell at debt sales. S&P cut the ratings of France and Austria in a string of downgrades after the close of trading yesterday that left Germany with the euro area’s only stable AAA grade. France’s 10-year debt rose this week even after a European government official said the nation was set to lose its top AAA rating in the S&P review. Finnish and Dutch 10-year yields also fell to records.

“The downgrade rumors led to a clearer leg down in bund yields and allowed new record lows,” said John Davies, a fixed- income strategist at WestLB AG in London. “There was general relief earlier in the week after the Italian auctions went OK because the market was a bit worried before them.”

Germany’s 30-year yield fell nine basis points, or 0.09 percentage point, this week to 2.35 percent, after dropping to a euro-era record 2.332 percent yesterday. The 3.25 percent bond maturing in July 2042 rose 2.24, or 22.40 euros per 1,000-euro ($1,267) face amount, to 119.375.

The 10-year yields fell nine basis points to 1.77 percent, and five-year yields declined three basis points to 0.75 percent after reaching a record low 0.733 percent yesterday.

France, Austria Downgrades

France and Austria were cut one level to AA+ from AAA and face the risk of further reductions, S&P said late yesterday. While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative watch. Spain and Italy were also among the nine nations downgraded.

The French rating reduction threatens the potency of the region’s main bailout fund, which owes its AAA label to guarantees from the euro-region’s top-rated nations.

European Central Bank President Mario Draghi said on Jan. 12 his strategy of injecting cash into the financial system is beginning to facilitate trading in seized-up credit markets. While “substantial downside risks” remain, there were signs conditions were stabilizing, he said after the central bank kept its benchmark interest rate at 1 percent.

Spain’s 10-year yields dropped 48 basis points this week to 5.22 percent. Similar-maturity Italian rates slid 49 basis points to 6.64 percent after touching 6.46 percent, the lowest since Dec. 21.

Italy Auction

Italy sold 3 billion euros of three-year notes yesterday at an average yield of 4.83 percent, down from 5.62 percent at the sale Dec. 29. Spain raised 9.98 billion euros from a note auction on Jan. 12, twice the maximum target. The average yield was 3.384 percent, down from 5.187 percent at the previous offering on Dec. 1.

France and Spain plan to sell bonds and bills next week, while Belgium and Portugal will auction bills.

Any rating downgrades would mean next week’s auctions are “not going to be pretty,” Lyn Graham-Taylor, a fixed income strategist at Rabobank International in London, said before the S&P announcement.

German government bonds are little changed this year, after gaining 9.7 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds have returned 1.7 percent in 2012, and French bonds have gained 0.4 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

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

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