German Note Yield Drops to Record on Confidence, Spain Concern

German bonds gained, with two-year note yields dropping to a record, as euro-area economic confidence declined and Spain’s prime minister said his country’s ability to fund itself is at risk.

Germany’s cost to borrow for two years dropped to as low as 0.089 percent, almost the same yield as three-month Treasury bills. Ten-year bunds advanced after the country’s inflation rate slowed to a 14-month low, boosting the appeal of fixed-income securities. Spanish bonds fell as Prime Minister Mariano Rajoy said more austerity is needed to cover funding needs and avoid needing a bailout.

“The fall in German yields confirms that markets are becoming more nervous again,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “The market is worried about the macroeconomic challenges in Spain. Euro-region sentiment surprised on the downside so that confirms that from a macroeconomic perspective nothing is improving in Europe.”

Germany’s two-year yield declined three basis points, or 0.03 percentage point, to 0.09 percent at 5 p.m. London time. The 0.25 percent note due in March 2014 gained 0.055, or 55 euro cents per 1,000-euro ($1,321) face amount, to 100.29. The 10-year yield fell six basis points to 1.68 percent.

The yield on the three-month U.S. Treasury bill was little changed at 0.086 percent.

Sentiment Worsens

An index of executive and consumer sentiment in the 17-nation euro area fell to 92.8 from a revised 94.5 in March, the European Commission said in Brussels. Economists surveyed by Bloomberg forecast a reading of 94.2. A gauge of sentiment among European manufacturers dropped to minus 9 from minus 7.1.

German government securities also gained after Deutsche Bank AG, the nation’s largest lender, said first-quarter profit slid 33 percent and PSA Peugeot Citroen, Europe’s second-biggest carmaker, said yesterday the European market was “weaker than expected,” spurring demand for safer assets.

German inflation, calculated using a harmonized European Union method, slowed to 2.2 percent in April from 2.3 percent in March, according to the Federal Statistics Office. That’s the lowest since February 2011.

Spanish bonds declined after the International Monetary Fund said yesterday the nation may need to use more public money to shore up its financial sector.

“What if the same thing happens to us as to those that haven’t been able to fund their debt on the markets, or find money to cover their deficit?” Rajoy told reporters today following a meeting in Madrid with NATO Secretary General Anders Fogh Rasmussen.

Spanish Bonds

Spain’s 10-year yield climbed three basis points to 5.83 percent, widening the spread over similar-maturity German bunds by nine basis points to 415 basis points. Spanish 10-year yields have risen above 6 percent on seven days this month, reflecting investor concern the nation’s borrowing costs may reach levels that prompted bailouts for Greece, Ireland and Portugal.

Italian bonds pared earlier losses after borrowing costs increased at a bill sale.

Italy’s Treasury sold 8.5 billion euros of six-month bills at a yield of 1.772 percent, up from 1.119 percent at the previous auction on March 28. Investors bid for 1.71 times the amount offered, versus 1.51 times last month.

“Although the Italian Tesoro had to pay more to get the paper away, Italian bonds remained quite steady as the target volume was achieved which is what the markets were primarily focused on,” Sercan Eraslan, a fixed-income strategist at WestLB AG in Dusseldorf, Germany, wrote in a note to clients.

Italy’s 10-year yield was little changed at 5.64 percent after rising as high as 5.71 percent.

German bonds returned 13 percent over the past year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italy’s securities gained 1.5 percent, and Spain’s have lost 1 percent.

Volatility in Dutch securities was the highest in euro-region markets, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps compiled by Bloomberg. The Dutch 10-year yield fell eight basis points to 2.25 percent.

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