Spain’s Bonds Drop as German Note Yield Falls Below Zero

German Note Yield Falls Below Zero on Economy, Before U.S. Jobs
German industrial production increased 0.2 percent in May from April, when it fell 2.2 percent, the Economy Ministry will say today, according to the median forecast of 36 analysts surveyed by Bloomberg News. Photographer: Simon Dawson/Bloomberg

Spanish bonds slumped, pushing 10-year yields above 7 percent for only the fifth day since the euro was created, amid concern politicians and central banks aren’t doing enough to prevent the region’s woes from deepening.

German two-year notes rose, sending yields to less than zero, as investors sought the highest-rated securities after the European Central Bank refrained from announcing extra measures to stem the crisis yesterday. Austrian, Dutch, Belgian and French note yields fell to records on demand for greater returns than those from German securities. A negative rate means investors who hold the debt to maturity will receive less than they paid to buy them.

“There are still a lot of questions that remain unanswered about the debt crisis, and we are cautious about peripheral bonds,” said John Stopford, head of fixed income at Investec Asset Management in London, which oversees $98 billion. “The market was disappointed that the ECB didn’t do more. Investors are also nervous about the macro picture. The risk is that they will continue to reduce exposure to peripheral bonds.”

Spain’s 10-year yield rose 17 basis points, or 0.17 percentage point, to 6.95 percent at 4:40 p.m. London time, after climbing to 7.04 percent, the highest since June 20. The 5.85 percent bond due in January 2022 fell 1.105, or 11.05 euros per 1,000-euro ($1,230) face amount, to 92.485. The yield jumped 62 basis points this week, the most since the five days through June 15.

ECB Cuts

The ECB cut the refinancing rate yesterday to an all-time low of 0.75 percent and reduced the deposit rate to zero, while stopping short of steps to cap Spanish and Italian yields. A yield of 7 percent on 10-year debt prompted Greece, Ireland and Portugal to seek sovereign bailouts.

Spain’s bonds also declined today after a government report showed industrial production fell for the ninth month in May. Output at factories, refineries and mines dropped 6.1 percent from a year earlier, after an 8.3 percent decline in April, the National Statistics Institute said in Madrid.

The euro depreciated 0.7 percent to $1.2301 after sliding 1.1 percent yesterday, and the rate at which European banks say they see each other lending in euros for three months dropped to a record low.

Germany’s two-year yield fell three basis points to minus 0.013 percent, and reached minus 0.018 percent, the lowest since at least 1990, when Bloomberg began compiling the data. The yield slid below zero for the first time since June 1. The bonds are rated AAA at Standard & Poor’s, compared with BBB+ for Spain.

‘Safe Assets’

JPMorgan Chase & Co. said it temporarily closed five of its European money-market funds to new investments after the ECB’s deposit rate cut. The biggest U.S. bank said in a notice to shareholders that it won’t accept new investors or money in five euro-denominated money-market and liquidity funds.

German bonds extended gains after a U.S. report showed employers hired fewer workers in June than economists forecast, supporting demand for haven assets. Payrolls rose 80,000 after a 77,000 increase in May. Economists projected a 100,000 gain.

The 10-year bund yield dropped five basis points to 1.33 percent, extending this week’s decline to 25 basis points. It reached a record-low 1.127 percent on June 1.

Austria’s two-year note yield fell as much as 12 basis points to 0.118 percent, French yields reached 0.166 percent, the Dutch rate touched 0.064 percent, and similar-maturity Belgian securities yielded as little as 0.428 percent.

“Investors are looking for relatively safe assets with some yield pickup, and that’s what French and Belgian bonds offer,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London. “Official rates could fall further given the economic outlook and yields on German bonds are heading toward their record lows.”

Bond Volatility

Italian bonds declined even as Prime Minister Mario Monti’s cabinet approved 26 billion euros of spending cuts to shore up public finances. The yield on the 10-year security rose four basis points to 6.02 percent.

Volatility on Austrian government debt was the highest in developed markets today, followed by Spain, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit default swaps.

German government debt returned 3.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian debt rose 8.1 percent, while Spanish securities lost 5.3 percent.

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