German 10-year bonds posted their biggest weekly advance on record as European leaders struggled to find funding for the euro-area rescue plan and admitted that Greece may exit the currency union.
The additional yield that investors receive for holding Italian, French, Greek and Belgian 10-year debt instead of benchmark German bunds rose to euro-era records as Group-of-20 leaders meeting in Cannes, France, disagreed on boosting the International Monetary Fund to fight the debt crisis. The Greek two-year note yield surged above 100 percent as Prime Minister George Papandreou was forced to backtrack on plans to hold a referendum over austerity measures. The European Central Bank unexpectedly cut interest rates.
“We had a knee-jerk reaction from the ECB rate cut but essentially there’s so much uncertainty about the outlook for Greece,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Against that backdrop investors continue to maintain exposure to German bonds because they provide the safest and most liquid market within the euro zone. Until the situation is Greece is resolved, bunds look pretty well underpinned.”
German 10-year yields dropped 35 basis points to 1.82 percent as of 4:42 p.m. London time yesterday. The 2.25 percent security due September 2021 climbed to 103.795. The two-year note yield declined 20 basis points to 0.40 percent.
The German two-year note yield slid to as low as 0.355 percent, three basis points from a record low, as investors sought the safest assets amid concern the crisis is damping growth.
ECB President Mario Draghi warned Europe is heading toward a “mild recession” after officials unanimously lowered the benchmark interest rate by 25 basis points to 1.25 percent on Nov. 3. Of 55 economists in a Bloomberg News survey, only four predicted the move.
The Greek two-year note yield jumped to as much as 107.26 percent the same day, after European leaders suspended aid to the debt stricken nation, pushing the country closer to the first default by an EU member. The yield on Italian 10-year bonds climbed to 6.40 percent, the most since 1997, even as the ECB was said to have bought the nation’s debt.
Bunds have handed investors a 7.7 percent return this year through Nov. 3, underperforming Treasuries, which gained 8.7 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian debt has lost 5.5 percent, compared to a 50 percent loss on Greek bonds.
European investor confidence data published Nov. 7 will show the sovereign debt crisis is damaging sentiment, according to a Bloomberg survey. The Sentix index will drop to minus 20, the least in more than two years, the median estimate of economists shows.
Austria and the Netherlands are scheduled to auction debt maturing in 2021 the following day, while Greece plans to sell 182-day bills. Germany will issue 2 billion euros of inflation-linked bonds on Nov. 9, while Finland auctions notes maturing in 2017 and 2021.