German, French Bond Yields at Record Lows; Spanish Debt Slides

German and French government bonds rose, pushing yields to record low levels, and securities of so-called peripheral nations such as Spain fell on concern Europe lacks a united response to its debt crisis.

The yield on Germany’s two-year notes, perceived to be the safest among European government debt securities, also dropped to the lowest since at least 1990 as stock markets declined. French Finance Minister Christine Lagarde said France wouldn’t follow German Chancellor Angela Merkel’s ban on so-called naked short selling of government bonds. Spanish bonds fell as the nation’s borrowing costs increased at a 10-year debt auction.

“It’s little bit scary, as it’s difficult to see a quick resolution to the situation,” said Elwin de Groot, a senior market economist at Rabobank Groep in Utrecht, Netherlands. “We are going to have more volatility and that will keep demand for the bunds strong.”

The 10-year bund yield declined eight basis points to 2.68 percent as of 4 p.m. in London, after reaching 2.65 percent earlier. The 3 percent security due July 2020 gained 0.72, or 7.2 euros per 1,000-euro face amount, to 102.28.

The spread between the bund and 10-year Treasuries narrowed five basis points to 55 basis points, indicating investors may perceive assets outside Europe as safer.

“There are large-scale portfolio shifts to the benefit of Treasuries and Japanese bonds at the expense of euro-denominated assets in general,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “This has to do with euro breakup speculation and all the noise regarding co-ordination problems in economic policy.”

Spanish Auction

Spanish bonds declined for a sixth day, with the 10-year yield rising three basis points to 4.05 percent. Investors demanded 137 basis points more in yield to hold the securities instead of bunds, the region’s benchmark government debt, up from 126 basis points yesterday. Italian bonds also fell, pushing the yield up by seven basis points to 3.97 percent.

Spain, one of the European Union’s most indebted countries, issued 3.52 billion euros of 10-year securities at an average yield of 4.045 percent, up from 3.855 percent at a sale in March. The auction attracted bids equivalent to 2.03 times the amount on offer, up from 1.55 times.

France sold 4.1 billion euros of securities maturing in 2012 at an average yield of 0.73 percent, attracting a so-called bid-to-cover ratio of 2.19. The French 10-year yield dropped seven basis points to 2.94 percent, the least since at least 1990, according to Bloomberg generic prices.


The 16 countries that share the euro need greater coordination of economic policies to avoid a financial crisis, Lagarde said today on RTL radio. “What we need is more economic convergence,” she said. “We can’t have models that counter each other. We must find the route to growth.”

Greece’s budget deficit triggered this year’s sovereign-debt crisis after the nation posted a budget deficit more than four times the European Union’s 3 percent limit.

Germany’s ban on so-called naked short sales, which lasts until March 31, 2011, applies to government debt and shares of 10 banks and insurers, financial regulator BaFin said May 18. When securities are sold naked, the trader doesn’t borrow the assets before submitting a sell order.

Germany didn’t tell the European Central Bank before announcing its ban on some speculation in government bonds, Italy’s Il Sole 24 Ore newspaper reported, citing ECB policymaker Jose Manuel Gonzalez-Paramo.

‘Security and Predictability’

“What investors need most of all is security and predictability, but they are getting ever less of these,” Ciaran O’Hagan, a fixed-income strategist at Societe Generale SA in Paris, wrote in a note to investors. “The cost of business and investment in euros is on the rise, and that will continue to scare off non-euro investors.”

Investors should favor German bonds over similar-dated Treasuries on speculation the yield premium between the notes will resume widening as European growth lags behind that of the U.S., according to Newedge Group.

“We suggest profiting from the 30-basis-point pullback in the 10-year spread to re-initiate a conditional widener again,” Jamal Meliani, a Paris-based fixed-income analyst at Newedge, wrote in a client note today. “The perception that the euro zone is lagging behind in the recovery process should maintain the spread on a widening trend.”

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