German Bonds Surge as ECB Cuts Rates Without Supporting Spain

German two-year note yields fell the most this year, pushing the rate below zero, after the European Central Bank cut interest rates and investors sought haven assets as the region’s financial woes deepened.

Spanish 10-year bonds posted their first weekly decline since June 15, pushing the yield to more than the 7 percent level that prompted Greece, Ireland and Portugal to seek sovereign bailouts. Austrian, Dutch, Belgian and French two-year yields fell to record lows. While the ECB reduced borrowing costs, it refrained from additional steps to cap debt yields such as buying sovereign bonds.

“If you believe that there may be further rate cuts for the ECB and you believe the crisis is not yet solved, I think there will continue to be strong demand for short-dated German paper,” said Elwin de Groot, senior market economist at Rabobank Nederland in Utrecht, the Netherlands. “We haven’t turned the corner.”

Germany’s two-year note yield fell 13 basis points this week to minus 0.01 percent at 4:26 p.m. London time yesterday, the biggest drop since the week through Dec. 2. It reached a record-low minus 0.018 percent yesterday. The zero percent securities due June 2014 gained 0.265, or 2.65 euros per 1,000- euro ($1,230) face amount, to 100.025.

Spain’s 10-year yield rose 62 basis points this week, the most since the five days through June 15, to 6.95 percent. It reached 7.04 percent yesterday, the highest since June 20.

ECB Rates

The ECB cut its main refinancing rate by 25 basis points to a record 0.75 percent on July 5 and cut the deposit rate to zero for the first time to revive the economy. The euro depreciated 2.9 percent this week to $1.23 and the rate at which European banks say they see each other lending in euros for three months dropped to an all-time low.

German bonds may extend their gains next week before a report on July 12 that economists said will show industrial production in the 17-nation euro area was stagnant in May after falling 1.1 percent in April.

German government debt returned 3.1 percent this year through July 5, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds lost 5.3 percent.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Roxana Zega in London at rzega@bloomberg.net

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

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