Europe’s highest-rated government bonds rose, with German two-year yields falling to a record minus 0.042 percent, as the European Central Bank said overnight deposits from financial firms slid as it ended paying interest.
Yields on Austrian, Belgian, French and Dutch securities also fell to all-time lows as banks sought higher returns than they could get from the ECB or from German notes. So-called core bonds extended gains as the ECB said in its monthly bulletin that some of the risks to the economic outlook it warned about had materialized. Italian bonds dropped as the nation sold one- year bills and prepared to auction securities due between 2015 and 2023 tomorrow.
“Investors are being forced into the front-end of euro curves,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London, referring to the region’s shorter-maturity debt. “They’re chasing the likes of Austria and France, which offer a small return.”
The German two-year yield declined two basis points, or 0.02 percentage point, to minus 0.039 percent at 4:27 p.m. London time. The zero percent note due June 2014 rose 0.045, or 45 euro cents per 1,000-euro ($1,219) face amount, to 100.075.
The 10-year bund yield fell two basis points to 1.25 percent, after reaching 1.235 percent, the lowest since June 6.
German borrowing costs have slid to record lows as the debt crisis, now in its third year, drives investors to the region’s safest assets. The nation sold 10-year bonds yesterday at an average yield of 1.31 percent, an all-time low. It plans to auction 5 billion euros of two-year notes on July 18.
Banks in the 17-nation euro region deposited 324.9 billion euros at the ECB last night, down from 808.5 billion euros the previous day, the Frankfurt-based central bank said. That’s the least since Dec. 21. Policy makers reduced the main refinancing rate to a record 0.75 percent on July 5 and cut the deposit rate to zero to stimulate credit supply and lending.
“The ECB didn’t like the amount of deposits it was seeing,” Monument Securities’ Ostwald said. “By cutting the deposit rate to zero, they’re forcing some of the smaller banks to take more risk.”
French five-year yields fell three basis points to 0.93 percent after reaching a record 0.888 percent. Austrian two-year yields dropped as much as seven basis points to 0.043 percent. Belgian 10-year yields tumbled as much as 11 basis points to 2.644 percent, while Dutch two-year yields declined to 0.009 percent, both records.
“Inflationary pressure over the policy-relevant horizon has been dampened further as some of the previously identified downside risks to the euro-area growth outlook have materialized,” the Frankfurt-based ECB said today in its monthly bulletin today. “Economic growth in the euro area continues to remain weak.”
The Italian Treasury sold 7.5 billion euros of 361-day bills at an average yield of 2.697 percent. That compares with 3.972 percent at an auction of similar-maturity securities on June 13.
Italy’s two-year note yield climbed five basis points to 3.79 percent, and the rate on similar-maturity Spanish debt increased three basis points to 4.47 percent.
Volatility on French government debt was the highest in euro-area markets today, followed by Belgium and Finland, according to measures of 10-year bonds, the spread between two- and 10-year securities, and credit-default swaps.
The difference in yield, or spread, between German two-year notes and 10-year bunds may shrink to the narrowest in almost seven weeks, according to data compiled by Bloomberg, based on technical indicators.
The spread, currently at 129 basis points, is below its 50- day moving average of 136 basis points and may target the June 1 low of 113 basis points, the data show.
German debt has returned 3.8 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French debt returned 6.6 percent, and Spanish securities lost 4.2 percent.
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