German 2-Year Yields Drop to Record Low on Spanish Woes

German bonds rose, sending two-year yields to a record low, as Standard & Poor’s cut Spain’s credit rating, adding to concern central banks and politicians are failing to contain the European debt crisis.

German two-year note yields dropped below rates on U.S. Treasury three-month bills yesterday as investors sought the safety of the euro region’s benchmark debt. Spain was lowered two steps to BBB+ from A -- three steps above non-investment grade -- as S&P said Spain will have to provide further fiscal support for banks. French bonds rose as Socialist Francois Hollande maintained a poll lead over President Nicolas Sarkozy going into the second round of presidential elections on May 6.

“German bond yields show how risk-averse the market is,” said Marchel Alexandrovich, a senior European economist at Jefferies International Ltd. in London. “There’s still a lot of uncertainty ahead.”

German two-year note yields dropped four basis points to 0.10 percent after falling to a record 0.075 percent in the week to trade at 100.28 percent of face value. The yield on 10-year German bunds fell one basis point from last week to 1.70 percent.

Italian 10-year yields rose for a seventh week to 5.67 percent from 5.66 percent on April 20.

French bonds climbed, pushing 10-year yields down 9 basis points to 3 percent. The extra yield investors demand for holding the securities instead of German bunds slid to 130 basis points from 138 basis points.

German bonds returned 1.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spain’s have lost 1.1 percent, and Italy’s securities gained 8.8 percent.

The European Central Bank holds a policy meeting on May 3. All 58 economists in a Bloomberg News survey predict the central bank will keep its benchmark interest rate unchanged at 1 percent.

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