Bunds Rise a Fourth Day on Haven Bid as Bill Rates Turn Negative

Germany’s government bonds advanced for a fourth day as conflict in Iraq and Ukraine stoked concern that fuel supplies will be disrupted, boosting demand for the safest fixed-income assets.

Two-year yields fell to the lowest in a year as Germany auctioned six-month debt with a negative rate for the first time in almost a year. Bonds from France and the Netherlands also climbed as euro-area inflation matched the lowest level since 2009. Stocks in Europe dropped as Iraq’s military attacked Sunni Muslim insurgents who had captured a swathe of territory north of the capital Baghdad.

“Iraq is the one that most likely acted as a reminder of all the risks, but also the Ukrainian-Russian situation,” said Jan Von Gerich, a fixed-income strategist at Nordea Bank AB in Helsinki.

Benchmark German 10-year yields fell one basis point, or 0.01 percentage point, to 1.35 percent at 4:10 p.m. London time. The 1.5 percent bund maturing May 2024 rose 0.11, or 1.10 euros per 1,000-euro ($1,357) face amount, to 101.375.

French 10-year yields dropped one basis point to 1.72 percent and Dutch rates declined two basis points to 1.60 percent.

Ukraine said Russia cut gas supplies after demanding fuel payments be made in advance, the first time shipments have been affected in this year’s crisis in relations between the two countries. The Stoxx Europe 600 Index fell 0.4 percent.

Negative Yields

Bonds rallied across the region after the European Central Bank unveiled a package of stimulus measures on June 5 that included charging lenders to deposit cash as it sought to stave off the risk of deflation. That’s helping to suppress short-term lending rates and boosting demand for higher-yielding government securities.

The Eonia fixing rate, a gauge of the cost of overnight borrowing in euros between banks, fell to 0.026 percent on June 13, the lowest on record.

Germany’s two-year yield touched 0.022 percent today, the least since May 28, 2013. The nation sold 1.5 billion euros of six-month bills at an average rate of minus 0.0015 percent down from 0.109 percent at a previous auction on May 12 and the lowest since July 8. A negative yield means investors holding the securities until they mature receive less back than they paid to buy them.

The ECB is poised for even bolder steps to stave off the threat of deflation, according to economists in a Bloomberg survey. The central bank will start buying asset-backed securities within a year, according to more than three-quarters of respondents in the Bloomberg Monthly Survey.

Additional Stimulus

Additional stimulus is unlikely in coming months as the ECB reviews lenders’ balance sheets, according to two euro-area central-bank officials familiar with current policy discussions.

The effect of any ECB measures could be blunted by the reluctance of banks to increase lending during the assessment, the people said, asking not to be identified because the deliberations aren’t public. The health check is scheduled to end in October.

The annualized euro-area inflation rate, calculated using a harmonized European-Union method, fell to 0.5 percent last month from 0.7 percent in April, matching the lowest reading since November 2009 and confirming an initial June 3 estimate.

German securities returned 4.1 percent this year through June 13, Bloomberg World Bond Indexes show. France’s and Austria’s earned 5.1 percent.

To contact the reporters on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; Eshe Nelson in London at enelson32@bloomberg.net

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

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