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German Note Yields Fall to Record After Talks; Greek Bonds Drop

German two-year notes rose, pushing yield to a record low, after a meeting between Chancellor Angela Merkel and French President Nicolas Sarkozy failed to ease concern the region’s debt crisis will spread.

Germany auctioned 3.9 billion euros ($4.98 billion) of six-month bills at a negative yield for the first time as investors sought out the safest assets. Ten-year bunds erased losses after a report showed industrial output in Europe’s largest economy declined, adding to signs growth may have stalled. Greek two-year yields climbed to a record amid concern the nation’s writedown deal with private-sector creditors will fail.

The yield at the auction shows investors are “saying I need to park the money super safe,” said Luca Jellinek, head of European rate strategy at Credit Agricole Corporate and Investment Bank in London. Shorter-maturity debt is “becoming somewhat divorced from the mainstream in the sense that they’re being utilized by investors to park liquidity in a time of uncertainty.”

Germany’s two-year yield fell two basis points, or 0.02 percentage point, to 0.14 percent at 5 p.m. London time, after slipping to 0.135 percent, the lowest since Bloomberg started tracking the data in 1990. The 0.25 percent note due December 2013 gained 0.045, or 45 euro cents, per 1,000-euro face amount, to 100.205. The 10-year yield was little changed at 1.85 percent after rising as much as four basis points.

Merkel and Sarkozy outlined plans that may see euro-area leaders complete their new budget rulebook by Jan. 30. They are also considering accelerating capital contributions to the bailout fund being set up this year to stem the debt crisis.

Best Return

German bonds gained 9.7 percent in 2011, the best return since 2008, according to indexes compiled by Bloomberg and European Federation of Financial Analysts Societies. Investors favored the securities as the debt crisis threatened to infect the euro area’s bigger economies and push the region into another recession.

Germany sold the six-month bills with a yield of minus 0.0122 percent, the first time a national money-market instrument offered a negative yield. The auction drew bids that were nearly double the amount allotted.

Industrial production in Germany fell 0.6 percent from October, when it rose 0.8 percent, the Economy Ministry said today. Economists forecast a 0.5 percent drop, according to a Bloomberg News survey.

The cost of insuring against non-payment on European sovereign debt rose to a record. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments rose as much as four basis points to 386. An increase signals deterioration in perceptions of credit quality.

Greek Notes

Two-year Greek notes dropped for a third day amid speculation the current restructuring plan involving so-called private-sector involvement will fail.

Greece is “one of the things that needs to be resolved fairly quickly,” said Peter Schaffrik, head of European rates strategy at RBC Capital Markets in London. “As the speculation starts to appear about bigger haircuts, potential failure of the PSI talks, there’s a bit more pessimism.”

Greece must do more to consolidate its finances, or private creditors must write off a larger share of their claims or euro-area countries have to add more funding, Der Spiegel reported on Jan. 7, citing an International Monetary Fund document.

The yield on the Greek two-year note climbed 41 percentage points to a record 176 percent. The price dropped to 20.975 percent of face value.

Highest Volatility

Volatility on Greek sovereign debt was the highest in euro-area markets today, followed by Ireland, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Irish two-year notes gained, with yields dropping 33 basis points to 7.45 percent, after a report showed consumer confidence plunged the most in a decade. The consumer sentiment index fell to 49.2 in December from 60.1 a month earlier, the biggest decline since August 2001.

French 10-year bonds gained, with yields falling five basis points to 3.31 percent. The extra yield investors demand to hold the securities instead of similar-maturity bunds narrowed four basis points to 147 basis points.

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