Bund Yields Drop to Records on Crisis Concern Before EU Summit

Germany’s bonds rose, with five-, 10-and 30-year yields dropping to records, on speculation European Union leaders meeting today will fail to agree on new measures to contain the sovereign debt crisis.

Thirty-year yields dropped below 2 percent for the first time after former Greek Prime Minister Lucas Papademos told the Wall Street Journal there’s a risk, albeit unlikely, the nation will leave the euro. Germany got bids for more than its maximum 5 billion-euro ($6.29 billion) target at a note sale as investors sought the region’s safest assets. Spain’s bonds fell as Prime Minister Mariano Rajoy said he will discuss the lack of liquidity in trading the securities at today’s summit.

“EU leaders are unlikely to come up with any support regarding key topics and may disappoint the market, so bunds should remain on the front foot,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “It was a strong auction. The retention rate was the lowest for more than three years,” he said, referring to the amount of debt kept by the central bank.

Germany’s 10-year yield fell eight basis points, or 0.08 percentage point, to 1.38 percent at 4:01 p.m. in London after dropping to 1.376 percent, the lowest since Bloomberg began tracking the data in 1989. The 1.75 percent bond due July 2022 rose 0.8, or 8 euros per 1,000-euro face amount, to 103.425.

The five-year yield declined seven basis points to 0.44 percent. It reached a record low 0.434 percent. The 30-year rate slid as much as 11 basis points to 1.986 percent.

Europe Summit

European Union officials damped expectations for the 27-nation summit starting at 7 p.m. in Brussels, pointing toward the next meeting on June 28-29 as the time to take pro-growth steps. The crisis in the 17 euro countries will come up tonight only “at the very end,” EU President Herman Van Rompuy said in a pre-summit letter.

German Chancellor Angela Merkel and French President Francois Hollande will seek a way to resolve the sovereign debt crisis at today’s meeting, balancing France’s desire to jumpstart growth with Germany’s preference for spending cuts.

Germany, the only country in the euro area with a stable outlook on its AAA rating, sold 4.56 billion euros of two-year notes today at a yield of 0.07 percent, an all-time low, according to Bundesbank data. The securities were the first auctioned by Germany carrying a zero-percent coupon. The previous two-year notes auctioned on April 18 had a coupon of 0.25 percent and were sold at a yield of 0.14 percent.

‘Historically Low’

The sale “reflects the now familiar crisis-induced trend of investors favoring a return of their money over a return on their money,” Richard McGuire, a senior fixed-income strategist at Rabobank International in London, wrote in an e-mailed note. “Even at these historically low levels, bund yields have further room to the downside.”

The German government also sold 1.29 billion euros of index-linked bonds maturing in April 2023 today, with a so-called real yield of minus 0.24 percent.

Spain’s 10-year yield climbed 13 basis points to 6.21 percent after rising as much as 15 basis points. Italy’s 10-year bonds snapped a five-day advance, with the yield rising 11 basis points to 5.69 percent.

Spanish bonds stayed lower after Rajoy said he planned to raise the lack of liquidity in the country’s bond market during today’s summit of European leaders. “Liquidity, sustainability and debt financing are three points that I am going to talk about,” he said at a press conference in Paris today after meeting Hollande.

Break-Even Rate

Germany’s 10-year break-even rate, a gauge of inflation expectations derived from the difference in yield between conventional and index-linked bonds, fell as much as 11 basis points to 1.41 percentage points, the lowest since Nov. 30.

The bonds of other AAA rated European nations also rallied. Finland’s 10-year yield dropped to a record 1.7 percent, while Dutch 10-year yields fell to an all-time low of 1.862 percent.

Volatility on German government bonds was the highest in euro-area markets today followed by Finland and the Netherlands, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Longer-maturity German bonds outperformed shorter-dated notes, with the difference in two- and 10-year yields shrinking to the narrowest in more than seven months.

The spread contracted seven basis points to 133 basis points, the least since Oct. 6, according to data compiled by Bloomberg based on closing prices. The spread is likely to be capped by its 50-day moving average at 157 basis points, the data show.

German debt has returned 2.8 percent this year, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies show, as investors sought a refuge from Europe’s financial woes. Spanish bonds dropped 2.6 percent.

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