German Two-Year Yields Climb to 7-Week High After ECB Holds Rate

Germany’s two-year notes fell for a fifth week after European Central Bank President Mario Draghi refrained from cutting interest rates and introducing new stimulus to boost the recovery.

Benchmark two-year yields climbed to the highest in seven weeks after ECB policy makers kept the main refinancing rate at a record-low 0.25 percent on March 6. Yields from Greece (GGGB10YR) to Ireland sank to the lowest since at least 2010 this week as the recovery from the sovereign-debt crisis gained momentum and the ECB raised its growth forecasts. Spain’s borrowing costs dropped to the lowest since 2006 at an auction.

“We saw some pressure at the front end of the yield curve because of speculation that we were likely to see a refi rate cut, even though it wasn’t consensus,” said Richard McGuire, a fixed-income strategist at Rabobank International in London. “What was notable and what was deemed to be less dovish than many expected was that Draghi held out no prospect of additional stimulus going forward.”

The German two-year yield rose five basis points, or 0.05 percentage point, in the week to 0.18 percent as of 5 p.m. London time yesterday, when it climbed to 0.195 percent, the highest level since Jan. 16. The 0.25 percent note due in March 2016 fell 0.105, or 1.05 euros per 1,000-euro ($1,387) face amount, to 100.14. The 10-year bund yield was at 1.65 percent, from 1.62 percent on Feb. 28.

Growth Forecasts

The ECB raised its forecast for gross domestic product in the currency bloc to increase 1.2 percent this year, compared with a previous prediction of 1.1 percent in December.

Traders pared bets for lower interbank borrowing costs after Draghi told a news conference in Frankfurt on March 6 that “the moderate recovery of the euro-area economy is proceeding” and said that inflation should be around 1.7 percent by the final quarter of 2016.

The inflation rate rose to an annualized 0.8 percent in February from 0.7 percent the previous month, according to a Feb. 28 report. It has been below the ECB’s ceiling of just below 2 percent for 13 months.

The implied yield on the Euribor futures contract expiring in December gained five basis points this week to 0.335 percent after rising to 0.345 percent yesterday, the most since Jan. 28.

German bonds extended declines after U.S. data yesterday showed employers added 175,000 workers in February, following a revised 129,000 increase the previous month. The median estimate in a Bloomberg survey was for a 149,000 gain.

Spanish Sale

Spain’s 10-year (GSPG10YR) yield dropped 15 basis points to 3.36 percent, the steepest weekly fall since the period ended Jan. 3. The rate fell to 3.35 percent on March 6, the least since January 2006, after the Madrid-based Treasury sold 1.1 billion euros of the securities at an average yield of 3.344 percent.

Italian 10-year (GBTPGR10) yields tumbled six basis points to 3.42 percent, after sliding to 3.36 percent on March 5, the lowest since October 2005. The rate on similar-maturity Irish bonds reached 3.04 percent, the least since 2005, while Greece’s fell to 6.62 percent on March 6, the lowest since May 2010.

Germany is scheduled to auction 4 billion euros of notes due in March 2016 on March 12. The Frankfurt-based Finance Agency last sold two-year debt on Feb. 12 at an average yield of 0.11 percent.

German bonds returned 2.1 percent this year through March 6, according to Bloomberg World Bond Indexes. Spanish securities gained 4.9 percent and Italy’s earned 4.2 percent.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Keith Jenkins, Mark McCord

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