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Austria 2-Year Yields Fall Below Zero as German Confidence Drops

Austria’s bonds rose, with two-year yields falling below zero for the first time, and French borrowing costs also dropped to the least on record as investors sought safer assets offering higher returns than German debt.

Spanish bonds fell as the nation sold 364- and 511-day securities. German two-year note yields dropped to a record as a government report showed investor confidence in Europe’s largest economy declined to a six-month low in July.

“It’s a story of the semi-core countries such as Austria, France and Belgium,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “German yields below zero are a sign for many investors to give up some safety for the higher yields they can find in the semi core. The safety of these bonds is good enough in comparison to Spain and Italy.”

Austria’s two-year yield fell as much as three basis points, or 0.03 percentage point, to a record minus 0.018 percent before being little changed at 0.02 percent at 10:21 a.m. London time. The 4.3 percent note maturing in July 2014 was at 108.50.

France’s two-year yield slipped three basis points to 0.051 percent after falling to an all-time low of 0.046 percent.

Austria, which was stripped of its AAA rating by Standard & Poor’s this year, has the lowest unemployment in the European Union and has a ratio of debt to gross domestic product of 72 percent, beaten only by the Netherlands, Finland and Spain among major economies sharing the euro. The nation still holds a top rating at Fitch Ratings and Moody’s Investors Service.

German Confidence

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, fell to minus 19.6, the lowest since January.

Germany’s two-year yield was at minus 0.047 percent after falling to minus 0.061 percent, the lowest level since Bloomberg began tracking the securities in 1990.

The yield on the benchmark 10-year bund rose two basis to 1.26 percent. It declined to a record 1.127 percent on June 1.

Germany’s borrowing costs have plunged over the past year as investors sought the nation’s debt as a haven from Europe’s financial turmoil. Bonds from other European countries perceived as safer than the so-called periphery have also gained as investors sought alternatives to negative returns.

Spain sold 3.56 billion euros ($4.38 billion) of bills, surpassing its maximum target of 3.5 billion euros. Demand for the 12-month securities was 2.23 times the amount sold, compared with 2.16 times in June, while the bid-to-cover ratio for the 18-month bills was 3.66 compared with 4.42.

The Spanish two-year bond yield increased five basis points to 4.7 percent.

Germany will auction 5 billion euros of two-year notes tomorrow, which may be sold at a negative yield for the first time. The nation auctioned two-year securities at a record-low yield of 0.07 percent on May 23.

German debt has returned 4.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities have lost 5.2 percent, with Belgian bonds making 12 percent, the indexes show.

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