German Yields Drop to Records as Italian Bonds Retreat

Italy’s 10-year bonds fell for a second day, pushing the yield above 6 percent, after Moody’s Investors Service cut the nation’s credit rating by two steps and reiterated its negative outlook.

Italian two-year notes reversed an earlier decline after borrowing costs fell at an auction of 3.5 billion euros ($4.3 billion) of securities maturing in 2015. Austrian, Belgian, French and German two-year yields declined to records and the rate on similar-maturity Dutch debt dropped below zero for the first time as investors sought the safest assets.

“The downgrade overnight pushed the selloff on Italian bonds,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “It should intensify the pressure on overseas investors to move out of Italian bonds.”

The yield on 10-year Italian debt jumped 15 basis points, or 0.15 percentage point, to 6.06 percent at 4:35 p.m. London time after climbing as high as 6.08 percent. The 5.5 percent security due in September 2022 fell 1.065, or 10.65 euros per 1,000-euro face amount, to 96.45.

Moody’s lowered the country’s bond rating to Baa2 from A3 and said further cuts were possible because the economic outlook has “deteriorated.” That’s two levels above junk and one higher than Spain, according to data compiled by Bloomberg.


Barclays Capital removed Italian securities from its World Government Inflation-Linked and Euro Government Inflation-Linked indexes, citing the rating downgrade. The change will be effective from month end, according to an e-mailed note.

The yield on Italy’s index-linked bond due in September 2021 climbed 46 basis points to 5.29 percent.

Italian notes rallied after the nation sold three-year debt at an average yield of 4.65 percent, versus 5.3 percent at a previous auction on June 14. Investors bid for 1.73 times the amount allotted, up from a bid-to-cover ratio of 1.59 last month. The nation also sold debt due in 2019, 2022 and 2023.

The two-year yield declined 19 basis points to 3.62 percent, after rising as much as 28 basis points.

Italy is Europe’s largest bond market with 1.64 trillion euros of bonds outstanding, according to the website of the nation’s debt agency.

Yield on Europe’s higher-rated bonds have plunged this month as investors sought a haven from the financial turmoil and the European Central Bank cut borrowing costs. Policy makers reduced the main refinancing rate to a record 0.75 percent on July 5 and cut the deposit rate to zero to stimulate lending.

German Notes

Germany’s two-year yield fell one basis point to minus 0.05 percent after declining to minus 0.052 percent, the lowest since Bloomberg began tracking the data in 1990. The five-year yield declined as much as two basis points to 0.285 percent, also an all-time low.

The yield on Austrian two-year notes dropped to a record-low 0.019 percent, while the Dutch two-year rate fell to minus 0.008 percent. Similar-maturity Belgian yields dropped as low as 0.265 percent and French yields reached 0.1 percent.

The average rate on European government bonds due in three to five years dropped to an all-time low of 1.95 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts.

Incentive ‘Eliminated’

“Because the ECB’s rate cut eliminated an incentive for banks to deposit funds at the central bank and Germany’s two-year yields are near zero, money is flowing into AA rated notes,” said Shinji Kunibe, chief portfolio manager for fixed-income investment in Tokyo at Nissay Asset Management Corp., which manages the equivalent of $69 billion. “France and Belgium are among the nations that benefit from the trend.”

Spanish 10-year bonds declined, with the yield rising three basis points to 6.65 percent.

Volatility on Italian government debt was the highest in euro-area markets today, followed by Germany and France, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit-default swaps.

Germany’s debt has returned 4 percent this year, according to the EFFAS indexes. Italian securities have earned 8.4 percent, while Spanish bonds lost 4.4 percent.

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