German two-year note yields climbed to the highest in 10 months as banks’ plans to repay European Central Bank loans added to signs the debt crisis is abating and damped demand for the region’s safest fixed-income assets.
Benchmark 10-year bund yields advanced to a three-month high. Austrian, Belgian, Dutch and French two-year notes slid after the Frankfurt-based central bank said 278 banks will hand back 137.2 billion euros ($184.7 billion) next week, the first opportunity for early repayment. That compares with the median forecast of 84 billion euros in a Bloomberg News survey. Italian 10-year yields fell to the lowest level since November 2010 after data showed German business confidence rose this month.
“The number is higher than expected, and it shows that banks are quite comfortable in terms of offloading excess liquidity,” said Padhraic Garvey, head of developed-market debt strategy at ING Bank NV in Amsterdam. “This goes along with the theme of a reduction in the flight to safety,” which should pressure German bunds, he said.
Germany’s two-year yields jumped eight basis points, or 0.08 percentage point, to 0.26 percent at 4:19 p.m. London time, after reaching 0.28 percent, the highest since March 22. The rate increased as much as 10 basis points, the most since Nov. 16, 2011. The zero percent securities maturing in December 2014 fell 0.15, or 1.50 euros per 1,000-euro face amount, to 99.52.
The 10-year bund yield advanced six basis points to 1.64 percent after climbing to 1.65 percent, the highest level since Oct. 18.
The Frankfurt-based central bank flooded financial markets with two tranches of three-year loans, or so-called Longer-Term Refinancing Operations, a year ago to avert a credit crunch after banks stopped lending because of Europe’s sovereign-debt crisis. About 150 billion euros of the first installment, which totaled 489 billion euros, will be given back early as banks continue to repay the funds over coming weeks, according to a Bloomberg survey.
“Amid fading tensions in the euro crisis, the ECB is taking back some of the extra liquidity it injected into the banking system,” Holger Schmieding, chief economist at Berenberg Bank AG in London, wrote in a note to clients. “The unwinding of the ECB’s non-standard support to the financial system has started.”
The first opportunity for financial institutions to return money from the second tranche, which amounted to 529 billion euros, is Feb. 27.
Futures traders increased bets that interbank borrowing costs will rise after the ECB’s announcement.
The implied yield on the three-month Euribor futures contract expiring in December 2013 climbed as much as 17 basis points to 0.595 percent, according to data compiled by Bloomberg. The price dropped to the lowest since July 3.
Three-month Euribor, the rate at which European banks say they see each other lending in euros, was at 0.214 percent today, according to data from the European Banking Federation. That’s the highest since Oct. 8.
“Following today’s announcement, the liquidity surplus should decline to 446 billion euros starting from next Wednesday,” London-based Barclays Plc strategists Laurent Fransolet and Giuseppe Maraffino wrote in a note to clients today. The market “is starting to price in the possibility of a repayment that could bring the liquidity surplus below 200 billion euros, with tightening of liquidity conditions.”
The yield on France’s two-year notes climbed seven basis points to 0.29 percent. The rate on similar-maturity Austrian securities rose six basis points to 0.27 percent. Dutch two-year yields advanced 10 basis points to 0.35 percent, while Belgium’s two-year rate increased nine basis points to 0.46 percent.
The Ifo institute’s business climate index, based on a survey of 7,000 executives, climbed to 104.2 from 102.4 in December. That’s the highest since June and the third straight gain. Sentiment dropped to a 2 1/2-year low in October. Economists predicted an increase to 103, according to the median of 41 forecasts in a Bloomberg News survey.
Ten-year Italian yields dropped three basis points to 4.13 percent after reaching 4.07 percent, the lowest level since Nov. 10, 2010. Spanish 10-year yields fell 12 basis points to 5.13 percent.
Volatility on Belgian bonds was the highest in euro-area markets today, followed by those of Finland and the Netherlands, according to measures of 10-year or similar-maturity debt, the yield spread between two-year and 10-year securities, and credit-default swaps.
German government bonds have handed investors a loss of 1.3 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt gained 1.8 percent and that of Italy rose 2.1 percent.
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