German 10-year government bonds declined as investors sought higher-yielding assets after the European Central Bank cut its benchmark rate and Greek Prime Minister George Papandreou signaled he won’t call a referendum.
Two-year German notes advanced after the ECB’s Governing Council cut the rate to 1.25 percent, a move predicted by just four of 55 economists in a Bloomberg survey. Italian and Spanish 10-year securities fluctuated after ECB President Mario Draghi said its asset-purchase program can’t sustainably reduce bond yields. Greek two-year yields rose above 100 percent for the first time after France and Germany threatened to withhold aid and said they would treat any referendum on Greece’s second bailout as a vote on its euro membership.
“The euro-zone politicians, Merkel and Sarkozy, are really playing tough and pushing Greece to make a firm position on sticking to the euro and implementing all the necessary austerity measures, or exiting,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. Today’s rate cut “definitely has supported the market today from a risk sentiment” perspective, pushing bund yields higher.
Germany’s 10-year yield climbed nine basis points, or 0.09 percentage point, to 1.91 percent at 4:29 p.m. London time. The 2.25 percent security due September 2021 fell 0.775, or 7.75 euros per 1,000-euro ($1,376) face amount, to 102.995. The two-year note yield fell three basis points to 0.39 percent.
German’s 10-year breakeven rate, a measure of inflation expectations over the life of the debt, rose seven basis points to 1.67 percent.
The interest-rate cut “was a surprise but one could at least argue that since September we’ve seen a couple of indicators deteriorating,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “The German bond curve steepened because of the cut, but further steepening may be limited as short-dated yields are already at extreme levels,” he said referring to the difference between two- and 10-year yields.
The ECB’s asset-purchase program can’t sustainably reduce bond yields, Draghi said in Frankfurt at his first press conference as ECB President. It is “limited” and “temporary,” he said.
“The ongoing tensions in financial markets are likely to dampen the pace of economic growth in the euro area in the second half and beyond,” Draghi said. Europe is heading toward a “mild recession by year end,” he said.
Spanish 10-year bonds fell, pushing the yield four basis points higher to 5.50 percent. Italian debt of a similar maturity was little changed with the yield at 6.18 percent, after rising to 6.40 percent.
Look at the Price
The two-year Greek yield jumped 5.60 percentage points to 102.28 percent after reaching 107.26 percent, the highest since Bloomberg began compiling data on the securities in 1998. The 4 percent note due in August 2013 fell to 31.08 percent of face value.
“You don’t have to look at the yield, only the price,” said Alessandro Giansanti, a senior interest-rate strategist at ING Groep NV in Amsterdam. “What the market does when you have a distressed situation is look at the price -- that’s what investors think they will get in a restructuring.”
Crisis talks ended in Cannes yesterday with German Chancellor Merkel and French President Sarkozy withholding 8 billion euros of assistance to Greece and warning it will surrender all European aid if the nation votes against a bailout package agreed on last week. A Group of 20 leaders summit is underway in the French resort.
Greek Prime Minister George Papandreou pledged Oct. 31 to hold a referendum on the region’s plan to write down the nation’s debt and the accompanying austerity measures, risking default if voters reject the deal. Germany’s best-selling Bild newspaper today called for Greece to be ejected from the euro and demanded that Germans hold their own vote on dispatching financial aid, signaling growing exasperation in Europe’s largest economy.
Papandreou today reached out to the opposition about setting up a transitional government, indicating that agreement would secure international aid and remove the need for the referendum.
The euro was little changed at $1.3753, after fluctuating in a range between $1.3657 and $1.3835.
Bunds have handed investors a return of 8.1 percent this year, underperforming U.S. Treasuries which have returned 9.1 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Volatility on Austrian sovereign debt was the highest among euro-area markets today, followed by the Netherlands, according to Bloomberg measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.