German government bonds advanced, with two-year yields falling to the lowest in a week, after the European Central Bank was said to weigh a negative deposit rate to bolster growth and prevent deflation.
Italian 10-year bonds pared a decline. The ECB is considering a smaller-than-normal cut in the deposit rate if officials decide to take it negative for the first time, two people with knowledge of the debate said. The U.S. Federal Open Market Committee is due to release the minutes of its October meeting today. Federal Reserve Chairman Ben S. Bernanke said yesterday that officials will probably keep the target interest rate near zero even after ending bond purchases.
“There does seem to be increasing chatter,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Clearly if we see any signs that the threat of deflation is growing then the ECB has a few instruments it can adopt and one of them is to push the deposit rate into negative territory. That’s clearly helping the short end of the market, and giving a bit of a lift to bunds.”
Germany’s two-year yield fell two basis points, or 0.02 percentage point, to 0.10 percent at 5 p.m. London time, after dropping to 0.091 percent, the least since Nov. 12. The zero percent note due December 2015 rose 0.04, or 40 euro cents per 1,000-euro ($1,345) face amount, to 99.8.
The five-year yield declined two basis points to 0.64 percent, while the 10-year rate was little changed at 1.71 percent.
German government bonds lost 1.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. French securities returned 0.2 percent and Dutch ones fell 1.3 percent.
Italian bonds underperformed their German counterparts as ECB Governing Council member Jens Weidmann, who heads Germany’s central bank, said he doesn’t “think it’s sensible to” loosen monetary policy further, telling German weekly newspaper Die Zeit that the debate about easing “distracts from the the real roots of this crisis.”
European bonds are being supported as officials debate further tools to secure the economic recovery and reduce the risk of deflation after they cut the main refinancing rate to a record low 0.25 percent on Nov. 7.
Policy makers left the deposit rate, the cost the ECB charges banks to park excess cash with it, at zero after they signaled that the effects of taking it into negative territory can’t be adequately predicted.
Italy’s 10-year yield rose two basis points to 4.08 percent after dropping on Nov. 7 to 4.04 percent, the least since May 28. The yield spread over bunds was 237 basis points, still down more than a percentage point from the 2013 high of 361 reached in March.
The rate on 10-year Spanish debt rose one basis point to 4.09 percent, leaving the spread with bunds at 238 basis points, from 412 basis points in February.
ECB Executive Board member Joerg Asmussen said yesterday while he wouldn’t exclude the use of a negative deposit rate if the outlook for inflation warranted it, he’d be “very careful with such an instrument.” He also said in an interview broadcast on Austria’s ORF radio that “when interest rates stay too low for too long that creates new risks that one then has to keep an eye on.”
Volatility on Belgian bonds was the highest in euro-area markets today, followed by those of Ireland and France, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.