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German Two-Year Yield Declines to Zero as Debt Crisis Escalates

German two-year notes rose, sending yields to zero for the first time, as investors were prepared to forgo a return in exchange for safety amid Europe’s escalating debt crisis.

Ten-year bund yields in Europe’s largest economy also dropped to a record. The European Commission called for direct euro-area aid for troubled banks and touted a region-wide deposit-guarantee system and common bond issuance as antidotes to the debt crisis now threatening to overwhelm Spain. Demand for AAA rated Dutch and Finnish securities also jumped after inconclusive elections in Greece on May 6 fueled speculation the country will exit the euro area.

“It’s just panic,” said David Keeble, head of fixed-income strategy at Credit Agricole CIB in New York. “We have so few safe assets in the world that just a small move in risk sentiment causes quite strange and outsized reactions. Until we’ve got the Greek election out of the way we’re just going to be in this horrible world. If you’re buying Europe right now there’s only really one credit which people want.”

Germany’s two-year note yield fell four basis points, or 0.04 percentage point, to zero, before closing at 0.01 percent at 5 p.m. London time. The zero percent security due in June 2014 climbed 0.065, or 65 euro cents per 1,000-euro ($1,240) face amount, to 99.98. The 10-year yield declined nine basis points to 1.27 percent, after reaching an all-time low of 1.261 percent. U.S. Treasury 10-year yields tumbled to a record low of 1.6170 percent.

Annual Return

German bonds have returned 3.7 percent this year, after gaining 9.7 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds have lost 4.5 percent in 2012, while Greek securities have slumped 41 percent, the gauges show.

Investors are seeking safety in Germany as the European financial turmoil that began in 2009 and led to bailouts for Greece, Portugal and Ireland shows no sign of abating. The crisis deepened after Greece’s elections propelled the Syriza party, which wants to annul the terms of the bailout, into second place.

“The fear is still there,” said Christian Reicherter, a Frankfurt-based analyst at DZ Bank AG. “People are looking for safe havens in every distance and German bunds are in the spotlight. It’s unbelievable how this trend persists.”

After more than two crisis-filled years and 386 billion euros in loan pledges to Greece, Ireland and Portugal, “markets remain exceptionally tense and vigilant and confidence is still weak,” the commission said.

Stable Outlook

Germany, the only country in the euro area with a stable outlook on its AAA rating, sold two-year notes carrying a zero percent coupon for the first time on May 23, attracting bids for more than the maximum 5 billion-euro target.

“There’s still a lot of uncertainty in Europe, and yields at these levels suggest people are looking for the safest assets they can find,” Carl Heinz Daube, a managing director of the Germany’s Federal Finance Agency, said in a telephone interview. “Not very long ago, investors hunted for yield, while risk and liquidity mattered less. These days, it’s the opposite. The market is risk averse.”

The euro tumbled to an almost two-year low of $1.2382 today as Spain’s borrowing costs jumped on concern banking losses will increase amid a surge in bad loans.

Greece was cut to CCC from B- by Fitch Ratings on May 17 on speculation the politically deadlocked country will not be able to sustain its euro membership.

“The strong showing of ‘anti-austerity’ parties in the May 6 parliamentary elections and subsequent failure to form a government underscores the lack of public and political support” for the country’s bailout from the European Union and International Monetary Fund, Fitch said in the statement.

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