German Two-Year Yield Drops Below Zero on Shift to Safety

Photographer: Ralph Orlowski/Bloomberg

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Photographer: Ralph Orlowski/Bloomberg

A statue of a bull stands outside the Frankfurt Stock Exchange in Frankfurt.

German government bonds rose, pushing two-year yields below zero for the first time in 10 weeks, as Cyprus sought an unprecedented tax on bank deposits, threatening to reignite Europe’s debt crisis.

Dutch and Finnish securities also rallied and Austria’s 10-year yields fell to a record as investors sought haven assets amid concern the levy would spark a run on Cyprus’s banks. A parliamentary vote on the measures, which were designed to reduce the size of a bailout for the island nation, was postponed for a second day until tomorrow. Italian and Spanish bonds pared declines on speculation any contagion from Cyprus will be contained.

“What is a surprise is that the smaller depositors aren’t protected, which is triggering concern that we will get a bank run,” said Michael Leister, an interest-rates analyst at Commerzbank AG in London. “Bunds are supported and will remain so at least for today.”

Germany’s two-year yield fell three basis points, or 0.03 percentage point, to 0.02 percent at 5 p.m. London time after sliding to minus 0.003 percent, negative for the first time since Jan. 2. The 0.25 percent note maturing in March 2015 climbed 0.05, or 50 euro cents per 1,000-euro ($1,297) face amount, to 100.455.

A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.

The 10-year bund yield dropped five basis points to 1.41 percent after declining to 1.35 percent, the least since Jan. 2.

Vote Delay

Cyprus plans to impose a levy of 6.75 percent on deposits of less than 100,000 euros and 9.9 percent on those of 100,000 euros or more to raise 5.8 billion euros. That would mean a smaller bailout for the Mediterranean nation than the 17.5 billion euros earlier envisaged to avert a collapse of its financial system.

Parliament will meet at 6 p.m. tomorrow to decide on depositor losses, speaker Yiannakis Omirou told reporters in Nicosia in comments televised live on state-run CYBC. A vote scheduled for today was deferred to examine changes to legislation, he said. Euro-area finance ministers plan to hold a conference call at 7:30 p.m. in Brussels to discuss the matter.

Cyprus’s government bonds declined, pushing the yield on the 4.625 percent security due in February 2020 up 157 basis points to 10.13 percent, the highest close since Feb. 6, according to data compiled by Bloomberg. The bid price for the securities was 73.64, while the offer price was 76.233.

The yield on Cypriot notes due in November 2015 climbed 328 basis points to 12.80 percent.

‘Fairly Calm’

Cyprus accounts for less than half of one percent of the 17-nation euro economy. While the bonds of Europe’s higher-debt and deficit nations fell today, Ireland, Spain and Portugal remain among the best performers this year of 26 sovereign markets tracked by Bloomberg and European Federation of Financial Analysts Societies.

Italy’s 10-year yields climbed four basis points to 4.63 percent after increasing as much as 21 basis points. Similar- maturity Spanish yields rose four basis points to 4.96 percent.

Portugal’s bonds dropped for a second day, with 10-year yields increasing nine basis points to 6.04 percent after jumping as much as 30 basis points.

“So far it seems like it’s fairly calm and if it can stay that way that’s good,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “The markets are not too scared. It is a big deal but everything depends on what happens within the next couple of days. If we get a deal then it should calm down very swiftly. That’s what I think is going to happen.”

‘Worrying Precedent’

Austrian 10-year yields fell three basis points to 1.70 percent after dropping to 1.642 percent, the lowest since Bloomberg began compiling data in 1993. Dutch 10-year yields declined five basis points to 1.67 percent, and Finland’s 10- year borrowing costs fell five basis points to 1.60 percent.

Volatility on Finnish bonds was the highest in euro-area markets today, followed by those of Austria and the Netherlands, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.

“The imposition of a deposit tax levy in Cyprus sets a worrying precedent and has potentially wider ramifications than just a local bank run,” Andre de Silva, head of Asian rates research at HSBC Holdings Plc in Hong Kong, wrote in a note to clients. “Risk-aversion should dominate this week.”

Germany’s debt has lost 0.5 percent this year through March 15, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds returned 0.3 percent, and Spain’s securities gained 3.7 percent.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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