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German 2-Year Yield Drops Below Zero as Crisis Deepens

German two-year note yields fell below zero for the first time as the euro-region’s deepening crisis saw investors willing to sacrifice any return in exchange for holding the region’s safest assets.

The 10-year borrowing costs of Austria, Belgium, Finland, France, Germany and the Netherlands dropped to records as euro-area unemployment rose to a record and Italy missed its target at a sale of bonds, driving investors to the region’s safer government securities. Spanish bonds dropped for a fourth week, pushing the 10-year yield above 6.5 percent after nationalized lender Bankia group said it will seek 19 billion euros ($23.5 billion) of state support.

“We’ve seen German two-year yields turn negative in a classic flight to safety,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Investors remain concerned about the preservation of their capital, rather than the return on it.”

The German two-year yield slid to as low as minus 0.012 percent, the first time the rate has been negative, according to data compiled by Bloomberg. The yield was at 0.007 percent at 4:16 p.m. London time yesterday, down four basis points, or 0.04 percentage point, this week. The price of the zero percent note due in June 2014 was at 99.985 percent of face value.

Italy’s bond yields surged after the nation missed its maximum target for sales of five- and 10-year securities at auctions on May 30. Spain is scheduled to sell bonds maturing between 2014 and 2022 on June 7.

Unemployment Record

Spain’s 10-year yield rose 19 basis points this week to 6.5 percent, while Italian benchmark debt added six basis points to 5.73 percent.

Separate reports yesterday showed euro-region unemployment rose to 11 percent in March and April, the most on record and U.S. employers added the smallest number of workers in a year in May.

A survey on May 30 showed economic confidence in the euro area declined more than economists forecast last month to the lowest in 2 1/2 years.

The 10-year bund rate dropped 20 basis points this week to 1.17 percent after reaching 1.127 percent, the lowest since Bloomberg began collecting the data in 1989. Its seven-week decline is the longest run since May 27 last year. Two-, five-and 30-year yields also fell to records, along with U.K. and U.S. 10-year debt.

French 10-year yields dropped 29 basis points to 2.23 percent after falling to a record 2.071 percent yesterday. The same day, rates on similar-maturity Austrian debt fell to 1.919 percent, Belgian yields fell to 2.743 percent, Dutch 10-year rates retreated to 1.486 percent and Finnish yields declined to 1.385 percent, all the lowest on record.

ECB Rate

The European Central Bank will keep its main refinancing rate at a record-low 1 percent on June 6, according to the median estimate of 58 economists in a Bloomberg survey. Twelve of the economists predict a cut of at least 25 basis points.

German debt has returned 4.7 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities have lost 5.2 percent, and Italian bonds rose 6.8 percent, the indexes show.

-- Editors: Mark McCord, Nicholas Reynolds

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