German Notes Drop on Nowotny as Greek Borrowing Costs Decline

German two-year notes fell for the first time in four days as European Central Bank Governing Council member Ewald Nowotny said he saw no need for “immediate” monetary-policy action to boost the economy.

Two-year yields climbed from near the lowest in a month reached yesterday as Nowotny said growth in the euro area has “upside” potential. Belgium’s 10-year bonds advanced for a third day as the nation sold new securities via banks. Greek borrowing costs dropped to a three-year low at a bill sale, Germany auctioned 905 million euros ($1.24 billion) of 10-year inflation-linked bunds, while the Netherlands sold 3.5 billion euros of three-year notes.

“The market is in a bit of a wait-and-see mode,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “Nowotny is a hawk and infamously suggested no chance of a rate cut just before the last rate cut in November, so the market takes his comments with a pinch of salt. It’s having a small upward impact on yields.”

Germany’s two-year yield climbed two basis points, or 0.02 percentage point, to 0.20 percent at the 5 p.m. close in London after dropping to 0.17 percent yesterday, the lowest level since Dec. 5. The zero percent note due in December 2015 fell 0.04, or 40 euro cents per 1,000-euro face amount, to 99.615.

The benchmark 10-year bund yield was little changed at 1.81 percent.

The euro area’s gross domestic product will expand “about 1 percent, there is even potential on the upside,” Nowotny said in a speech at a Euromoney Conference in Vienna. “As we see inflation expectations well anchored, I don’t see a need for immediate action,” he said.

Forward Guidance

ECB President Mario Draghi strengthened the central bank’s commitment to keep borrowing costs low when policy makers kept the main refinancing rate at 0.25 percent on Jan. 9. “We firmly reiterate our forward guidance that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period,” Draghi said.

“The ECB’s approach can be considered a success so far,” Deutsche Bank AG economists including Peter Hooper in New York wrote in a research note. “Bond yields in the core of the euro area so far have not reacted much to the Fed’s tapering since December, while peripheral rates have significantly fallen. That the ECB is genuinely ready to do more is now a widely held belief in the market.”

Euro-area industrial production rose 1.8 percent in November, after contracting a revised 0.8 percent the previous month, the European Union’s statistics office said today. The median estimate of analysts in a Bloomberg News survey was for an increase of 1.4 percent.

Belgian Sale

Belgium sold 5 billion euros of 10-year bonds through banks after yesterday canceling an auction scheduled for Jan. 20, the debt agency said. The notes maturing in June 2024 were priced to yield 2.639 percent.

“Supply is not negative if demand is strong, as is now the case,” said Piet Lammens, head of research at KBC Bank NV based in Brussels.

Belgium’s 10-year bond yield dropped three basis points to 2.44 percent.

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

Spanish Spread

Greece sold 1.625 billion euros of 13-week bills to yield 3.75 percent, the lowest rate for a sale of similar-maturity debt since October 2010.

Spanish 10-year yields were little changed at 3.82 percent.

The extra yield investors demand to hold the securities over similar-maturity German bunds was little changed at 200 basis points after expanding to 203 basis points, the widest since Jan. 3. It shrank to 175 basis points on Jan. 9, the narrowest since April 2011.

“I would absolutely not consider this to signal the onset of a bearish trend or a bearish reversal in terms of risk sentiment,” said Richard McGuire, a fixed-income strategist at Rabobank International in London. “Risk sentiment will be supported from a fundamental or liquidity perspective, which means that peripheral spreads should continue to narrow.”

The Netherlands allotted three-year notes at an average yield of 0.572 percent, up from 0.275 percent at a previous auction on Nov. 26.

Germany is scheduled to sell 5 billion euros of notes due in February 2019 tomorrow. It last auctioned five-year debt on Dec. 4 at an average yield of 0.68 percent, compared with a rate of 0.71 percent at a previous sale on Nov. 6.

German bonds earned 0.3 percent in the 12 months through yesterday, according to Bloomberg World Bond Indexes. Spanish bonds returned 11 percent and Italy’s gained 6.4 percent.

To contact the reporters on this story: Eshe Nelson in London at enelson32@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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