The difference in yield between two-year notes sold by Denmark and Germany narrowed to the smallest gap since January as Cyprus’s economic crisis renewed demand for safe assets.
The spread between benchmark two-year notes sold by the Danish government and similar-maturity German bunds shrank to 16 basis points as of 10:50 a.m. in Copenhagen. That’s the narrowest since Jan. 9, according to data compiled by Bloomberg.
“Cyprus has put risk aversion back in the market as the structure of the euro is back on the drawing board,” Jes Asmussen, chief economist at Svenska Handelsbanken AB in Copenhagen, said in a phone interview. “As long as investors question the sustainability of the euro, we will see an aversion to risk.”
Denmark, which boasts a public debt load that’s less than half the euro area’s average, emerged as a haven from the region’s debt crisis last year. The central bank in Copenhagen, which defends the krone’s peg to the euro, has held its deposit rate below zero since year in an effort to counter the capital influx.
Cyprus’s economic plight has forced economists to abandon estimates that the central bank will raise the deposit rate above zero within the next three months. Nationalbanken won’t follow a January rate increase with more tightening after Italy’s political stalemate and Cyprus’s economic woes reignited Europe’s debt crisis, according to Asmussen.
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